Oaktree Capital Group, LLC - FORM 10-Q - November 4, 2016

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EX-32.2 - EXHIBIT 32.2 - Oaktree Capital Group, LLCexhibit3223q2016.htm
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EX-31.2 - EXHIBIT 31.2 - Oaktree Capital Group, LLCexhibit3123q2016.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
________________
  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                      to                     .
Commission File Number 001-35500
________________
Oaktree Capital Group, LLC
(Exact name of registrant as specified in its charter)
________________
Delaware
 
26-0174894
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
333 South Grand Avenue, 28th Floor
Los Angeles, CA 90071
Telephone: (213) 830-6300
(Address, zip code, and telephone number, including
area code, of registrant’s principal executive offices)
________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
 
Large accelerated filer   x
Accelerated filer   o
 
Non-accelerated filer   o
Smaller reporting company   o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  x
As of November 1, 2016, there were 62,913,996 Class A units and 92,038,771 Class B units of the registrant outstanding.


TABLE OF CONTENTS
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 

1

FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, our future results of operations and financial performance. In some cases, you can identify forward-looking statements by words such as “anticipate,” “approximately,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “seek,” “should,” “will” and “would” or the negative version of these words or other comparable or similar words. These statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those indicated in these statements. Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Such forward-looking statements are subject to risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity, including, but not limited to, changes in our anticipated revenue and income, which are inherently volatile; changes in the value of our investments; the pace of our raising of new funds; changes in assets under management; the timing and receipt of, and impact of taxes on, carried interest; distributions from and liquidation of our existing funds; the amount and timing of distributions on our Class A units; changes in our operating or other expenses; the degree to which we encounter competition; and general economic and market conditions. The factors listed in the item captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 (“annual report”) and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2016 and on August 4, 2016, respectively, which are accessible on the SEC’s website at www.sec.gov, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in our forward-looking statements.
Forward-looking statements speak only as of the date of this quarterly report. Except as required by law, we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.



In this quarterly report, unless the context otherwise requires:
“Oaktree,” “OCG,” “we,” “us,” “our” or “our company” refers to Oaktree Capital Group, LLC and, where applicable, its subsidiaries and affiliates.
“Oaktree Operating Group,” or “Operating Group,” refers collectively to the entities in which we have a minority economic interest and indirect control that either (i) act as or control the general partners and investment advisers of our funds or (ii) hold interests in other entities or investments generating income for us.
“OCGH” refers to Oaktree Capital Group Holdings, L.P., a Delaware limited partnership, which holds an interest in the Oaktree Operating Group and all of our Class B units.
“OCGH unitholders” refers collectively to our senior executives, current and former employees and certain other investors who hold interests in the Oaktree Operating Group through OCGH.
“2007 Private Offering” refers to the sale completed on May 25, 2007 of 23,000,000 of our Class A units to qualified institutional buyers (as defined in the Securities Act) in a transaction exempt from the registration requirements of the Securities Act. Prior to our initial public offering, these Class A units traded on a private over-the-counter market developed by Goldman, Sachs & Co. for tradable unregistered equity securities.
“assets under management,” or “AUM,” generally refers to the assets we manage and equals the NAV (as defined below) of the assets we manage, the leverage on which management fees are charged, the undrawn capital that we are entitled to call from investors in our funds pursuant to their capital commitments, and the aggregate par value of collateral assets and principal cash held by our collateralized loan obligation vehicles (“CLOs”). Our AUM amounts include AUM for which we charge no fees. Our definition of AUM is not based on any definition contained in our operating agreement or the agreements governing the funds that we manage. Our calculation of AUM and the two AUM-related metrics described below may not be directly comparable to the AUM metrics of other investment managers.
•
“management fee-generating assets under management,” or “management fee-generating AUM,” is a forward-looking metric and reflects the beginning AUM on which we will earn management fees in the following quarter, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment and Operating Metrics—Assets Under Management—Management Fee-generating Assets Under Management.”
•
“incentive-creating assets under management,” or “incentive-creating AUM,” refers to the AUM that may eventually produce incentive income, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment and Operating Metrics—Assets Under Management—Incentive-creating Assets Under Management.”
“consolidated funds” refers to the funds and CLOs that Oaktree is required to consolidate as of the respective reporting date.
“funds” refers to investment funds and, where applicable, CLOs and separate accounts that are managed by us or our subsidiaries.
“initial public offering” refers to the listing of our Class A units on the New York Stock Exchange on April 12, 2012 whereby Oaktree sold 7,888,864 Class A units and selling unitholders sold 954,159 Class A units.
“Intermediate Holding Companies” collectively refers to the subsidiaries wholly owned by us.
“net asset value,” or “NAV,” refers to the value of all the assets of a fund (including cash and accrued interest and dividends) less all liabilities of the fund (including accrued expenses and any reserves established by us, in our discretion, for contingent liabilities) without reduction for accrued incentives (fund level) because they are reflected in the partners’ capital of the fund.  
“Relevant Benchmark” refers, with respect to:
•
our U.S. High Yield Bond strategy, to the Citigroup U.S. High Yield Cash-Pay Capped Index;
•
our Global High Yield Bond strategy, to an Oaktree custom global high yield index that represents 60% BofA Merrill Lynch High Yield Master II Constrained Index and 40% BofA Merrill Lynch Global Non-Financial High Yield European Issuers 3% Constrained, ex-Russia Index – USD Hedged from inception


through December 31, 2012, and the BofA Merrill Lynch Non-Financial Developed Markets High Yield Constrained Index – USD Hedged thereafter;
•
our European High Yield Bond strategy, to the BofA Merrill Lynch Global Non-Financial High Yield European Issuers excluding Russia 3% Constrained Index (USD Hedged);
•
our U.S. Senior Loan strategy (with the exception of the closed-end funds), to the Credit Suisse Leveraged Loan Index;
•
our European Senior Loan strategy, to the Credit Suisse Western European Leveraged Loan Index (EUR Hedged);
•
our U.S. Convertible Securities strategy, to an Oaktree custom convertible index that represents the Credit Suisse Convertible Securities Index from inception through December 31, 1999, the Goldman Sachs/Bloomberg Convertible 100 Index from January 1, 2000 through June 30, 2004, and the BofA Merrill Lynch All U.S. Convertibles Index thereafter;
•
our non-U.S. Convertible Securities strategy, to an Oaktree custom non-U.S. convertible index that represents the JACI Global ex-U.S. (Local) Index from inception through December 31, 2014 and the Thomson Reuters Global Focus ex-U.S. (USD hedged) Index thereafter;
•
our High Income Convertible Securities strategy, to the Citigroup U.S. High Yield Market Index; and
•
our Emerging Markets Equities strategy, to the Morgan Stanley Capital International Emerging Markets Index (Net).
“senior executives” refers collectively to Howard S. Marks, Bruce A. Karsh, Jay S. Wintrob, John B. Frank, Stephen A. Kaplan, David M. Kirchheimer and Sheldon M. Stone.
“Sharpe Ratio” refers to a metric used to calculate risk-adjusted return. The Sharpe Ratio is the ratio of excess return to volatility, with excess return defined as the return above that of a riskless asset (based on the three-month U.S. Treasury bill, or for our European Senior Loan strategy, the Euro Overnight Index Average) divided by the standard deviation of such return. A higher Sharpe Ratio indicates a return that is higher than would be expected for the level of risk compared to the risk-free rate.
This quarterly report and its contents do not constitute and should not be construed as an offer of securities of any Oaktree funds.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Oaktree Capital Group, LLC
Condensed Consolidated Statements of Financial Condition (Unaudited)
($ in thousands)
 
 
As of

September 30,
2016
 
December 31,
2015
Assets
 
 
 
Cash and cash-equivalents
$
461,389

 
$
480,590

U.S. Treasury and time deposit securities
676,226

 
661,116

Corporate investments (includes $97,757 and $67,626 measured at fair value as of September 30, 2016 and December 31, 2015, respectively)
1,040,994

 
213,988

Due from affiliates
154,893

 
35,899

Deferred tax assets
426,138

 
425,798

Other assets
230,372

 
254,267

Assets of consolidated funds:
 
 
 
Cash and cash-equivalents
300,701

 
2,850,512

Investments, at fair value
3,676,412

 
45,179,906

Dividends and interest receivable
15,730

 
189,693

Due from brokers
76,098

 
706,708

Receivable for securities sold
39,045

 
163,799

Derivative assets, at fair value
185

 
198,351

Other assets
1,193

 
402,104

Total assets
$
7,099,376

 
$
51,762,731

Liabilities and Unitholders’ Capital
 
 
 
Liabilities:
 
 
 
Accrued compensation expense
$
215,372

 
$
319,834

Accounts payable, accrued expenses and other liabilities
172,182

 
121,934

Due to affiliates
360,193

 
356,851

Debt obligations
795,678

 
846,354

Liabilities of consolidated funds:
 
 
 
Accounts payable, accrued expenses and other liabilities
14,647

 
128,774

Payables for securities purchased
329,731

 
478,437

Securities sold short, at fair value
57,133

 
91,246

Derivative liabilities, at fair value
516

 
300,208

Distributions payable
4,499

 
364,773

Borrowings under credit facilities
174,700

 
6,442,742

Debt obligations of CLOs
2,840,252

 
2,330,359

Total liabilities
4,964,903

 
11,781,512

Commitments and contingencies (Note 15)

 


Non-controlling redeemable interests in consolidated funds
319,718

 
38,173,125

Unitholders’ capital:
 
 
 
Class A units, no par value, unlimited units authorized, 62,913,996 and 61,969,860 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
—

 
—

Class B units, no par value, unlimited units authorized, 92,038,771 and 91,937,873 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
—

 
—

Paid-in capital
741,093

 
735,166

Retained earnings
36,377

 
—

Accumulated other comprehensive income (loss)
351

 
(1,216
)
Class A unitholders’ capital
777,821

 
733,950

Non-controlling interests in consolidated subsidiaries
1,007,936

 
1,043,930

Non-controlling interests in consolidated funds
28,998

 
30,214

Total unitholders’ capital
1,814,755

 
1,808,094

Total liabilities and unitholders’ capital
$
7,099,376

 
$
51,762,731


Please see accompanying notes to condensed consolidated financial statements.

1

Oaktree Capital Group, LLC
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per unit amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 

 
 
 
 

Management fees
$
190,974

 
$
47,106

 
$
584,542

 
$
148,848

Incentive income
99,256

 
3,385

 
242,894

 
3,949

Total revenues
290,230

 
50,491

 
827,436

 
152,797

Expenses:
 
 
 
 
 
 
 
Compensation and benefits
(97,552
)
 
(101,240
)
 
(308,959
)
 
(319,133
)
Equity-based compensation
(19,838
)
 
(12,494
)
 
(48,460
)
 
(40,283
)
Incentive income compensation
(47,385
)
 
(4,907
)
 
(92,653
)
 
(107,010
)
Total compensation and benefits expense
(164,775
)
 
(118,641
)
 
(450,072
)
 
(466,426
)
General and administrative
(32,252
)
 
(37,627
)
 
(113,032
)
 
(77,695
)
Depreciation and amortization
(3,867
)
 
(4,032
)
 
(12,076
)
 
(10,031
)
Consolidated fund expenses
(1,445
)
 
(30,218
)
 
(3,991
)
 
(118,269
)
Total expenses
(202,339
)
 
(190,518
)
 
(579,171
)
 
(672,421
)
Other income (loss):
 
 
 
 
 
 
 
Interest expense
(32,414
)
 
(56,023
)
 
(86,849
)
 
(155,334
)
Interest and dividend income
46,817

 
454,384

 
120,225

 
1,455,624

Net realized gain (loss) on consolidated funds’ investments
(1,436
)
 
318,267

 
8,647

 
1,650,645

Net change in unrealized appreciation (depreciation) on consolidated funds’ investments
10,231

 
(2,357,989
)
 
(15,742
)
 
(3,268,891
)
Investment income
65,758

 
10,342

 
136,205

 
38,718

Other income (expense), net
543

 
6,368

 
11,892

 
13,925

Total other income (loss)
89,499

 
(1,624,651
)
 
174,378

 
(265,313
)
Income (loss) before income taxes
177,390

 
(1,764,678
)
 
422,643

 
(784,937
)
Income taxes
(8,567
)
 
(1,893
)
 
(29,818
)
 
(15,253
)
Net income (loss)
168,823

 
(1,766,571
)
 
392,825

 
(800,190
)
Less:
 
 
 
 
 
 
 
Net (income) loss attributable to non-controlling interests in consolidated funds
(13,243
)
 
1,779,225

 
(15,618
)
 
1,034,521

Net income attributable to non-controlling interests in consolidated subsidiaries
(97,283
)
 
(10,767
)
 
(241,785
)
 
(174,377
)
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

Distributions declared per Class A unit
$
0.58

 
$
0.50

 
$
1.60

 
$
1.70

Net income per unit (basic and diluted):
 
 
 
 
 
 
 
Net income per Class A unit
$
0.93

 
$
0.04

 
$
2.17

 
$
1.27

Weighted average number of Class A units outstanding
62,755

 
48,440

 
62,424

 
47,304










Please see accompanying notes to condensed consolidated financial statements.

2

Oaktree Capital Group, LLC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)

Three Months Ended September 30, 2016
 
Oaktree Capital Group, LLC
 
Non-controlling Interests in Consolidated Subsidiaries
 
Non-controlling Interests in Consolidated Funds
 
Total
Net income
$
58,297

 
$
97,283

 
$
13,243

 
$
168,823

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(109
)
 
(163
)
 
—

 
(272
)
Unrealized gain on interest-rate swap designated as cash-flow hedge
151

 
223

 
—

 
374

Other comprehensive loss, net of tax
42

 
60

 
—

 
102

Total comprehensive income
58,339

 
97,343

 
13,243

 
168,925

Less: Comprehensive income attributable to non-controlling interests
—

 
(97,343
)
 
(13,243
)
 
(110,586
)
Comprehensive income attributable to Oaktree Capital
       Group, LLC
$
58,339

 
$
—

 
$
—

 
$
58,339

Three Months Ended September 30, 2015
 
 

 
 

 
 

 
 

Net income (loss)
$
1,887

 
$
10,767

 
$
(1,779,225
)
 
$
(1,766,571
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(444
)
 
(967
)
 
—

 
(1,411
)
Unrealized gain on interest-rate swap designated as cash-flow hedge
56

 
122

 
—

 
178

Other comprehensive loss, net of tax
(388
)
 
(845
)
 
—

 
(1,233
)
Total comprehensive income (loss)
1,499

 
9,922

 
(1,779,225
)
 
(1,767,804
)
Less: Comprehensive (income) loss attributable to non-controlling interests
—

 
(9,922
)
 
1,779,225

 
1,769,303

Comprehensive income attributable to Oaktree Capital
       Group, LLC
$
1,499

 
$
—

 
$
—

 
$
1,499


 





















Please see accompanying notes to condensed consolidated financial statements.

3

Oaktree Capital Group, LLC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) — (Continued)
(in thousands)

Nine Months Ended September 30, 2016
 
Oaktree Capital Group, LLC
 
Non-controlling Interests in Consolidated Subsidiaries
 
Non-controlling Interests in Consolidated Funds
 
Total
Net income
$
135,422

 
$
241,785

 
$
15,618

 
$
392,825

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,337

 
1,972

 
—

 
3,309

Unrealized gain on interest-rate swap designated as cash-flow hedge
230

 
339

 
—

 
569

Other comprehensive income, net of tax
1,567

 
2,311

 
—

 
3,878

Total comprehensive income
136,989

 
244,096

 
15,618

 
396,703

Less: Comprehensive income attributable to non-controlling interests
—

 
(244,096
)
 
(15,618
)
 
(259,714
)
Comprehensive income attributable to Oaktree Capital
       Group, LLC
$
136,989

 
$
—

 
$
—

 
$
136,989

Nine Months Ended September 30, 2015
 
 

 
 

 
 

 
 

Net income
$
59,954

 
$
174,377

 
$
(1,034,521
)
 
$
(800,190
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(738
)
 
(1,801
)
 
—

 
(2,539
)
Unrealized gain on interest-rate swap designated as cash-flow hedge
147

 
314

 
—

 
461

Other comprehensive loss, net of tax
(591
)
 
(1,487
)
 
—

 
(2,078
)
Total comprehensive income (loss)
59,363

 
172,890

 
(1,034,521
)
 
(802,268
)
Less: Comprehensive (income) loss attributable to non-controlling interests
—

 
(172,890
)
 
1,034,521

 
861,631

Comprehensive income attributable to Oaktree Capital
       Group, LLC
$
59,363

 
$
—

 
$
—

 
$
59,363
























Please see accompanying notes to condensed consolidated financial statements.

4

Oaktree Capital Group, LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
392,825

 
$
(800,190
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Investment income
(136,205
)
 
(38,718
)
Depreciation and amortization
12,076

 
10,031

Equity-based compensation
48,460

 
40,283

Net realized and unrealized loss from consolidated funds’ investments
7,095

 
1,618,246

Amortization (accretion) of original issue and market discount of consolidated funds’ investments, net
(5,674
)
 
(4,419
)
Income distributions from corporate investments in funds and companies
85,342

 
48,826

Other non-cash items
5,246

 
9,184

Cash flows due to changes in operating assets and liabilities:
 
 
 
Decrease in other assets
32,268

 
35,620

Increase (decrease) in net due to affiliates
(35,138
)
 
8,334

Decrease in accrued compensation expense
(104,462
)
 
(68,954
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
54,318

 
(26,879
)
Cash flows due to changes in operating assets and liabilities of consolidated funds:
 
 
 
(Increase) decrease in dividends and interest receivable
(3,191
)
 
11,837

(Increase) decrease in due from brokers
80,271

 
(690,519
)
Increase in receivables for securities sold
(24,895
)
 
(88,942
)
(Increase) decrease in other assets
(509
)
 
184,544

Increase (decrease) in accounts payable, accrued expenses and other liabilities
(870
)
 
36,132

Increase in payables for securities purchased
180,712

 
58,859

Purchases of securities
(2,554,034
)
 
(14,351,834
)
Proceeds from maturities and sales of securities
1,762,068

 
11,839,995

Net cash used in operating activities
(204,297
)
 
(2,168,564
)
Cash flows from investing activities:
 
 
 
Purchases of U.S. Treasury and time deposit securities
(633,124
)
 
(290,645
)
Proceeds from maturities and sales of U.S. Treasury and time deposit securities
618,014

 
290,054

Corporate investments in funds and companies
(50,807
)
 
(41,289
)
Distributions and proceeds from corporate investments in funds and companies
175,008

 
45,570

Purchases of fixed assets
(67,599
)
 
(21,069
)
Net cash provided by (used in) investing activities
41,492

 
(17,379
)

(continued)









 
Please see accompanying notes to condensed consolidated financial statements.

5

Oaktree Capital Group, LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) — (Continued)
(in thousands)
 

 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt obligations
$
100,000

 
$
—

Payment of debt issuance costs
(1,310
)
 
—

Repayment of debt obligations
(150,000
)
 
—

Proceeds from issuance of Class A units
—

 
237,820

Purchase of OCGH units
—

 
(237,820
)
Repurchase and cancellation of units
(11,504
)
 
(4,512
)
Distributions to Class A unitholders
(100,395
)
 
(79,651
)
Distributions to OCGH unitholders
(181,642
)
 
(219,822
)
Contributions from non-controlling interests
—

 
4,000

Distributions to non-controlling interests
(5,293
)
 
(4,612
)
Cash flows from financing activities of consolidated funds:
 
 
 
Contributions from non-controlling interests
116,896

 
4,295,992

Distributions to non-controlling interests
(54,278
)
 
(4,236,330
)
Proceeds from debt obligations issued by CLOs
426,292

 
882,574

Payment of debt issuance costs
(7,974
)
 
(17,163
)
Borrowings on credit facilities
389,836

 
4,932,370

Repayments on credit facilities
(208,330
)
 
(3,459,094
)
Net cash provided by financing activities
312,298

 
2,093,752

Effect of exchange rate changes on cash
(6,315
)
 
(9,006
)
Net increase (decrease) in cash and cash-equivalents
143,178

 
(101,197
)
Cash and cash-equivalents, beginning balance
3,331,102

 
3,348,494

Change in cash and cash-equivalents from adoption of accounting guidance
(2,712,190
)
 
—

Cash and cash-equivalents, ending balance
$
762,090

 
$
3,247,297

 
 
 
 






















Please see accompanying notes to condensed consolidated financial statements.

6

Oaktree Capital Group, LLC
Condensed Consolidated Statements of Changes in Unitholders’ Capital (Unaudited)
(in thousands)

 
Oaktree Capital Group, LLC  
 
Non-controlling Interests in Consolidated Subsidiaries
 
Non-controlling Interests in Consolidated Funds
 
Total Unitholders’ Capital
 
Class A Units
 
Class B Units
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Unitholders’ capital as of December 31, 2015
61,970

 
91,938

 
$
735,166

 
$
—

 
$
(1,216
)
 
$
1,043,930

 
$
30,214

 
$
1,808,094

Activity for the nine months ended September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative-effect adjustment from adoption of accounting guidance
—

 
—

 
(12,912
)
 
—

 
—

 
(109,709
)
 
—

 
(122,621
)
Issuance of Class A units
1,240

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of Class B units
—

 
630

 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of units associated with forfeitures
(51
)
 
(111
)
 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of units
(245
)
 
(418
)
 
—

 
—

 
—

 
—

 
—

 
—

Repurchase and cancellation of units
—

 
—

 
(11,191
)
 
—

 
—

 
(313
)
 
—

 
(11,504
)
Equity reallocation between controlling and non-controlling interests
—

 
—

 
11,892

 
—

 
—

 
(11,892
)
 
—

 
—

Capital increase related to equity-based compensation
—

 
—

 
19,488

 
—

 
—

 
28,759

 
—

 
48,247

Distributions declared
—

 
—

 
(1,350
)
 
(99,045
)
 
—

 
(186,935
)
 
(2,584
)
 
(289,914
)
Net income
—

 
—

 
—

 
135,422

 
—

 
241,785

 
1,368

 
378,575

Foreign currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
1,337

 
1,972

 
—

 
3,309

Unrealized gain on interest-rate swap designated as cash-flow hedge, net of tax
—

 
—

 
—

 
—

 
230

 
339

 
—

 
569

Unitholders’ capital as of September 30, 2016
62,914

 
92,039

 
$
741,093

 
$
36,377

 
$
351

 
$
1,007,936

 
$
28,998

 
$
1,814,755

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unitholders’ capital as of December 31, 2014
43,764

 
109,089

 
$
536,431

 
$
11,378

 
$
(1,070
)
 
$
1,265,961

 
$
27,430

 
$
1,840,130

Activity for the nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of Class A units
4,908

 
—

 
237,820

 
—

 
—

 
—

 
—

 
237,820

Issuance of Class B units
—

 
1,338

 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of units associated with forfeitures
—

 
(105
)
 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of units
—

 
(5,004
)
 
—

 
—

 
—

 
—

 
—

 
—

Purchase of OCGH units from OCGH unitholders
—

 
—

 
(237,820
)
 
—

 
—

 
—

 
—

 
(237,820
)
Deferred tax effect resulting from the purchase of OCGH units
—

 
—

 
11,025

 
—

 
—

 
—

 
—

 
11,025

Repurchase and cancellation of units
—

 
—

 
—

 
—

 
—

 
(4,512
)
 
—

 
(4,512
)
Capital contributions
—

 
—

 
—

 
—

 
—

 
4,000

 
2,880

 
6,880

Equity reallocation between controlling and non-controlling interests
—

 
—

 
47,698

 
—

 
—

 
(47,698
)
 
—

 
—

Capital increase related to equity-based compensation
—

 
—

 
12,023

 
—

 
—

 
26,936

 
—

 
38,959

Distributions declared
—

 
—

 
(8,319
)
 
(71,332
)
 
—

 
(224,434
)
 
(1,962
)
 
(306,047
)
Net income
—

 
—

 
—

 
59,954

 
—

 
174,377

 
2,744

 
237,075

Foreign currency translation adjustment, net of tax
—

 
—

 
—

 
—

 
(738
)
 
(1,801
)
 
—

 
(2,539
)
Unrealized gain on interest-rate swap designated as cash-flow hedge, net of tax
—

 
—

 
—

 
—

 
147

 
314

 
—

 
461

Unitholders’ capital as of September 30, 2015
48,672

 
105,318

 
$
598,858

 
$
—

 
$
(1,661
)
 
$
1,193,143

 
$
31,092

 
$
1,821,432






Please see accompanying notes to condensed consolidated financial statements.

7

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2016
($ in thousands, except where noted)



1. ORGANIZATION AND BASIS OF PRESENTATION
Oaktree Capital Group, LLC (together with its subsidiaries, “Oaktree” or the “Company”) is a leader among global investment managers specializing in alternative investments. Oaktree emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Funds managed by Oaktree (the “Oaktree funds”) include commingled funds, separate accounts and collateralized loan obligation vehicles (“CLOs”). Commingled funds include open-end and closed-end limited partnerships in which the Company makes an investment and for which it serves as the general partner. CLOs are structured finance vehicles in which the Company typically makes an investment and for which it serves as collateral manager.
Oaktree Capital Group, LLC is a Delaware limited liability company that was formed on April 13, 2007. The Company is owned by its Class A and Class B unitholders. Oaktree Capital Group Holdings GP, LLC acts as the Company’s manager and is the general partner of Oaktree Capital Group Holdings, L.P. (“OCGH”), which owns 100% of the Company’s outstanding Class B units. OCGH is owned by the Company’s senior executives, current and former employees, and certain other investors (collectively, the “OCGH unitholders”). The Company’s operations are conducted through a group of operating entities collectively referred to as the “Oaktree Operating Group.” OCGH has a direct economic interest in the Oaktree Operating Group and the Company has an indirect economic interest in the Oaktree Operating Group. The interests in the Oaktree Operating Group are referred to as the “Oaktree Operating Group units.” An Oaktree Operating Group unit is not a separate legal interest but represents one limited partnership interest in each of the Oaktree Operating Group entities. Class A units are entitled to one vote per unit. Class B units are entitled to ten votes per unit and do not represent an economic interest in the Company. The number of Class B units held by OCGH increases or decreases in response to corresponding changes in OCGH’s economic interest in the Oaktree Operating Group; consequently, the OCGH unitholders’ economic interest in the Oaktree Operating Group is reflected within non-controlling interests in consolidated subsidiaries in the accompanying condensed consolidated financial statements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The condensed consolidated financial statements include the accounts of the Company, its wholly-owned or majority-owned subsidiaries and entities in which the Company is deemed to have a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. Certain of the Oaktree funds consolidated by the Company are investment companies that follow a specialized basis of accounting established by GAAP. All intercompany transactions and balances have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2016.

8

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies of the Company
Consolidation
In February 2015, the Financial Accounting Standards Board (“FASB”) amended its consolidation guidance which changed the way a reporting entity should evaluate limited partnerships and similar entities for consolidation, how a decision maker’s fees affect the consolidation analysis, and how interests held by related parties affect the consolidation analysis. The Company adopted this guidance as of January 1, 2016 under the modified retrospective approach, which did not require prior periods to be recast. In connection with the adoption, the Company reevaluated all of its investment vehicles and other legal entities for consolidation and, as of January 1, 2016, deconsolidated substantially all of its previously consolidated investment funds because those funds, which had previously been evaluated as voting interest entities, became variable interest entities (“VIEs”) under the new consolidation guidance. The Company is not the primary beneficiary of these VIEs because its fee arrangements are not deemed to be variable interests, and it does not hold any other interests in those funds that are considered to be more than insignificant. The adoption resulted in a reduction to total consolidated assets, liabilities, non-controlling redeemable interests in consolidated funds and unitholders' capital as of January 1, 2016 of $45.7 billion, $7.6 billion, $38.0 billion and $90.6 million, respectively. There was no impact on retained earnings or net income attributable to the Company.
The Company consolidates entities in which it has a direct or indirect controlling financial interest based on either a variable interest model or voting interest model. A limited partnership or similar entity is a VIE if the unaffiliated limited partners do not have substantive kick-out or participating rights. Most of the Oaktree funds are VIEs because they have not granted unaffiliated limited partners substantive kick-out or participating rights. The Company consolidates all VIEs in which it is the primary beneficiary. An entity is deemed to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine (a) whether an entity in which the Company holds a variable interest is a VIE and (b) whether the Company’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance-based fees), would give it a controlling financial interest. A decision maker’s fee arrangement is not considered a variable interest if it is compensation for services provided, commensurate with the level of effort required to provide those services and part of a compensation arrangement that includes only terms, conditions or amounts that are customarily present in arrangements for similar services negotiated at arm’s length (“at-market”), and the decision maker does not hold any other variable interests that absorb more than an insignificant amount of the potential VIE’s expected residual returns.
The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Company, affiliates of the Company or third parties) or amendments to the governing documents of the respective Oaktree funds could affect an entity’s status as a VIE or the determination of the primary beneficiary. Please see note 3 for more information regarding VIEs. For entities that are not VIEs, the Company evaluates those entities that it controls through a majority voting interest model.
“Consolidated funds” refers to Oaktree-managed funds and CLOs that Oaktree is required to consolidate. When funds or CLOs are consolidated, the Company reflects the assets, liabilities, revenues, expenses and cash flows of the funds or CLOs on a gross basis, and the majority of the economic interests in those funds or CLOs, which are held by third-party investors, are reflected as non-controlling interests in consolidated funds or debt obligations of CLOs in the condensed consolidated financial statements. All of the revenues earned by the Company as investment manager of the consolidated funds are eliminated in consolidation. However, because the

9

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

eliminated amounts are earned from and funded by third-party investors, the consolidation of a fund does not impact net income or loss attributable to the Company.
Certain entities in which the Company has the ability to exert significant influence, including unconsolidated Oaktree funds for which the Company acts as general partner, are accounted for under the equity method of accounting.
Non-controlling Redeemable Interests in Consolidated Funds
The Company records non-controlling interests to reflect the economic interests of the unaffiliated limited partners. These interests are presented as non-controlling redeemable interests in consolidated funds within the condensed consolidated statements of financial condition, outside of the permanent capital section. Limited partners in open-end and evergreen funds generally have the right to withdraw their capital, subject to the terms of the respective limited partnership agreements, over periods ranging from one month to three years. While limited partners in consolidated closed-end funds generally have not been granted redemption rights, these limited partners do have withdrawal or redemption rights in certain limited circumstances that are beyond the control of the Company, such as instances in which retaining the limited partnership interest could cause the limited partner to violate a law, regulation or rule.
The allocation of net income or loss to non-controlling redeemable interests in consolidated funds is based on the relative ownership interests of the unaffiliated limited partners after the consideration of contractual arrangements that govern allocations of income or loss. At the consolidated level, potential incentives are allocated to non-controlling redeemable interests in consolidated funds until such incentives become allocable to the Company under the substantive contractual terms of the limited partnership agreements of the funds.
Non-controlling Interests in Consolidated Funds
Non-controlling interests in consolidated funds represent the equity interests held by third-party investors in CLOs that had not yet priced as of the respective period end. All non-controlling interests in those CLOs are attributed a share of income or loss arising from the respective CLO based on the relative ownership interests of third-party investors after consideration of contractual arrangements that govern allocations of income or loss. Investors in those CLOs are generally unable to redeem their interests until the respective CLO liquidates, is called or otherwise terminates.
Non-controlling Interests in Consolidated Subsidiaries
Non-controlling interests in consolidated subsidiaries reflect the portion of unitholders’ capital attributable to OCGH unitholders (“OCGH non-controlling interest”) and third parties. All non-controlling interests in consolidated subsidiaries are attributed a share of income or loss in the respective consolidated subsidiary based on the relative economic interests of the OCGH unitholders or third parties after consideration of contractual arrangements that govern allocations of income or loss. Please see note 11 for more information.
Goodwill and Intangibles
Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired businesses. Goodwill has an indefinite useful life and is not amortized, but instead is tested for impairment annually in the fourth quarter of each fiscal year, or more frequently when events or circumstances indicate that impairment may have occurred.
The Company's identifiable intangible assets acquired in business combinations primarily relate to contractual rights to earn future management fees and incentive income. Finite-lived intangible assets are amortized over their estimated useful lives, which range from three to seven years, and are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable.

10

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Fair Value of Financial Instruments
GAAP establishes a hierarchical disclosure framework that prioritizes the inputs used in measuring financial instruments at fair value into three levels based on their market observability. Market price observability is affected by a number of factors, such as the type of instrument and the characteristics specific to the instrument. Financial instruments with readily available quoted prices from an active market or for which fair value can be measured based on actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.
Financial assets and liabilities measured and reported at fair value are classified as follows:
•
Level I – Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement. The types of investments in Level I include exchange-traded equities, debt and derivatives with quoted prices.
•
Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are directly or indirectly observable. Level II inputs include interest rates, yield curves, volatilities, prepayment risks, loss severities, credit risks and default rates. The types of investments in Level II generally include corporate bonds and loans, government and agency securities, less liquid and restricted equity investments, over-the-counter traded derivatives, other investments where the fair value is based on observable inputs, and upon adoption of the new CLO measurement guidance as of January 1, 2016, debt obligations of consolidated CLOs.
•
Level III – Valuations for which one or more significant inputs are unobservable. These inputs reflect the Company’s assessment of the assumptions that market participants use to value the investment based on the best available information. Level III inputs include prices of quoted securities in markets for which there are few transactions, less public information exists or prices vary among brokered market makers. The types of investments in Level III include non-publicly traded equity, debt, real estate and derivatives.
In some instances, the inputs used to value an instrument may fall into multiple levels of the fair-value hierarchy. In such instances, the instrument’s level within the fair-value hierarchy is based on the lowest of the three levels (with Level III being the lowest) that is significant to the fair-value measurement. The Company’s assessment of the significance of an input requires judgment and considers factors specific to the instrument. Transfers of assets into or out of each fair value hierarchy level as a result of changes in the observability of the inputs used in measuring fair value are accounted for as of the beginning of the reporting period. Transfers resulting from a specific event, such as a reorganization or restructuring, are accounted for as of the date of the event that caused the transfer.
In the absence of observable market prices, the Company values Level III investments using valuation methodologies applied on a consistent basis. The quarterly valuation process for Level III investments begins with each portfolio company, property or security being valued by the investment and/or valuation teams. With the exception of open-end funds, all unquoted Level III investment values are reviewed and approved by (i) the Company’s valuation officer, who is independent of the investment teams, (ii) a designated investment professional of each strategy and (iii) for a substantial majority of unquoted Level III holdings as measured by market value, a valuation committee of the respective strategy.  For open-end funds, unquoted Level III investment values are reviewed and approved by the Company’s valuation officer. For certain investments, the valuation process also includes a review by independent valuation parties, at least annually, to determine whether the fair values determined by management are reasonable. Results of the valuation process are evaluated each quarter, including an assessment of whether the underlying calculations should be adjusted or recalibrated. In connection with this process, the Company periodically evaluates changes in fair-value measurements for reasonableness, considering items such as industry trends, general economic and market conditions, and factors specific to the investment.
Certain assets are valued using prices obtained from brokers or pricing vendors. The Company obtains an average of one to two broker quotes. The Company seeks to obtain at least one quote directly from a broker making a market for the asset and one price from a pricing vendor for the specific or similar securities. These investments may be classified as Level III because the quoted prices may be indicative in nature for securities that

11

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions. The Company evaluates the prices obtained from brokers or pricing vendors based on available market information, including trading activity of the subject or similar securities, or by performing a comparable security analysis to ensure that fair values are reasonably estimated. The Company also performs back-testing of valuation information obtained from brokers and pricing vendors against actual prices received in transactions. In addition to ongoing monitoring and back-testing, the Company performs due diligence procedures surrounding pricing vendors to understand their methodology and controls to support their use in the valuation process.
The Company adopted the new CLO measurement guidance on a modified retrospective approach as of January 1, 2016. Upon adoption, the Company elected the fair value option for the financial liabilities of the consolidated CLOs and determined that the fair value of the CLO assets was more observable than the fair value of the CLO liabilities. Accordingly, the fair value of the CLO liabilities was measured as the fair value of CLO assets less the sum of (a) the fair value of any beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services.
Fair Value Option
The Company has elected the fair value option for certain corporate investments that otherwise would not have reflected unrealized gains and losses in current-period earnings. Such election is irrevocable and is applied on an investment-by-investment basis at initial recognition. Unrealized gains and losses resulting from changes in fair value are reflected as a component of investment income in the condensed consolidated statements of operations. The Company’s accounting for those investments is similar to its accounting for investments held by the consolidated funds at fair value and the valuation methods used to determine the fair value of those investments.
The Company has elected the fair value option for the financial assets and financial liabilities of its consolidated CLOs. The assets and liabilities of CLOs are primarily reflected within the investments, at fair value and within the debt obligations of CLOs line items in the condensed consolidated statements of financial condition. The Company’s accounting for CLO assets is similar to its accounting for its funds with respect to both carrying investments held by CLOs at fair value and the valuation methods used to determine the fair value of those investments. CLO liabilities are measured based on the more observable fair value of CLO assets under the new CLO measurement guidance, as discussed under “—Fair Value of Financial Instruments” above. Realized gains or losses and changes in the fair value of CLO assets, respectively, are included in net realized gain on consolidated funds’ investments and net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations. Interest income of CLOs is included in interest and dividend income, and interest expense and other expenses, respectively, are included in interest expense and consolidated fund expenses in the condensed consolidated statements of operations. Changes in the fair value of a CLO’s financial liabilities in accordance with the CLO measurement guidance are included in net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations. Please see notes 5 and 9 for more information.
Accounting Policies of Consolidated Funds
Investments, at Fair Value
The consolidated funds include investment limited partnerships and CLOs that reflect their investments, including majority-owned and controlled investments, at fair value. The Company has retained the specialized investment company accounting guidance under GAAP for investment limited partnerships with respect to consolidated investments and has elected the fair value option for the financial assets of CLOs. Thus, the consolidated investments are reflected in the condensed consolidated statements of financial condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).
Non-publicly traded debt and equity securities and other securities or instruments for which reliable market quotations are not available are valued by management using valuation methodologies applied on a consistent basis. These securities may initially be valued at the acquisition price as the best indicator of fair value. The

12

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Company reviews the significant unobservable inputs, valuations of comparable investments and other similar transactions for investments valued at acquisition price to determine whether another valuation methodology should be utilized. Subsequent valuations will depend on the facts and circumstances known as of the valuation date and the application of valuation methodologies as further described below under “—Non-publicly Traded Equity and Real Estate Investments.” The fair value may also be based on a pending transaction expected to close after the valuation date.
Exchange-traded Investments
Securities listed on one or more national securities exchanges are valued at their last reported sales price on the date of valuation. If no sale occurred on the valuation date, the security is valued at the mean of the last “bid” and “ask” prices on the valuation date. Securities that are not readily marketable due to legal restrictions that may limit or restrict transferability are generally valued at a discount from quoted market prices. The discount would reflect the amount market participants would require due to the risk relating to the inability to access a public market for the security for the specified period and would vary depending on the nature and duration of the restriction and the perceived risk and volatility of the underlying securities. Securities with longer duration restrictions or higher volatility are generally valued at a higher discount. Such discounts are generally estimated based on put option models or an analysis of market studies. Instances where the Company has applied discounts to quoted prices of restricted listed securities have been infrequent. The impact of such discounts is not material to the Company’s condensed consolidated statements of financial condition and results of operations for all periods presented.
Credit-oriented Investments (including Real Estate Loan Portfolios)
Investments in corporate and government debt which are not listed or admitted to trading on any securities exchange are valued at the mean of the last bid and ask prices on the valuation date based on quotations supplied by recognized quotation services or by reputable broker-dealers.
The market-yield approach is considered in the valuation of non-publicly traded debt securities, utilizing expected future cash flows and discounted using estimated current market rates. Discounted cash-flow calculations may be adjusted to reflect current market conditions and/or the perceived credit risk of the borrower. Consideration is also given to a borrower’s ability to meet principal and interest obligations; this may include an evaluation of collateral and/or the underlying value of the borrower utilizing techniques described below under “—Non-publicly Traded Equity and Real Estate Investments.”
Non-publicly Traded Equity and Real Estate Investments
The fair value of equity and real estate investments is determined using a cost, market or income approach. The cost approach is based on the current cost of reproducing a real estate investment less deterioration and functional and economic obsolescence. The market approach utilizes valuations of comparable public companies and transactions, and generally seeks to establish the enterprise value of the portfolio company or investment property using a market-multiple methodology. This approach takes into account the financial measure (such as EBITDA, adjusted EBITDA, free cash flow, net operating income, net income, book value or net asset value) believed to be most relevant for the given company or investment property. Consideration also may be given to factors such as acquisition price of the security or investment property, historical and projected operational and financial results for the portfolio company, the strengths and weaknesses of the portfolio company or investment property relative to its comparable companies or properties, industry trends, general economic and market conditions, and others deemed relevant. The income approach is typically a discounted cash-flow method that incorporates expected timing and level of cash flows. It incorporates assumptions in determining growth rates, income and expense projections, discount and capitalization rates, capital structure, terminal values, and other factors. The applicability and weight assigned to market and income approaches are determined based on the availability of reliable projections and comparable companies and transactions.
The valuation of securities may be impacted by expectations of investors’ receptiveness to a public offering of the securities, the size of the holding of the securities and any associated control, information with respect to transactions or offers for the securities (including the transaction pursuant to which the investment was made and the elapsed time from the date of the investment to the valuation date), and applicable restrictions on the transferability of the securities.

13

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

These valuation methodologies involve a significant degree of management judgment. Accordingly, valuations by the Company do not necessarily represent the amounts that eventually may be realized from sales or other dispositions of investments. Fair values may differ from the values that would have been used had a ready market for the investment existed, and the differences could be material to the condensed consolidated financial statements.
Recent Accounting Developments
In October 2016, the FASB amended the consolidation guidance with respect to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a VIE. Under the guidance, a reporting entity considers its indirect economic interests in a VIE held through related parties that are under common control on a proportionate basis, consistent with the way it would evaluate its indirect economic interests held through related parties that are not under common control. Previously, a reporting entity’s indirect economic interests in a VIE held through related parties that are under common control were considered to be the equivalent of direct interests in their entirety. The guidance is effective for the Company in the first quarter of 2017, with early adoption permitted. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments add to or clarify guidance on a number of cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from equity-method investees and beneficial interests in securitization transactions. The guidance is effective for the Company in the first quarter of 2018, generally on a retrospective basis, with early adoption permitted. The Company is currently evaluating the effect that adoption will have on its consolidated financial statements.
In March 2016, the FASB issued guidance that affects several aspects of accounting for employee share-based payment awards. The amendments would impact the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for the Company in the first quarter of 2017, with early adoption permitted. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued guidance eliminating the requirement to retroactively apply the equity method of accounting when a reporting entity obtains significant influence over an investment (e.g., due to an increase in ownership) that previously had been accounted for under the cost basis or at fair value. Instead, the reporting entity would be required to apply the equity method of accounting prospectively from the date significant influence was obtained. The cost of the additional interest in the investee, if any, should be added to the current basis of the investment. The amendment also provides guidance for available-for-sale investments that become eligible for the equity method of accounting. In those cases, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings as of the date the investment initially qualifies for the use of the equity method. The guidance is effective for the Company in the first quarter of 2017 on a prospective basis, with early adoption permitted. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued guidance that will require a lessee to recognize a lease asset and a lease liability for most of its operating leases. Under current GAAP, operating leases are not recognized by a lessee in its statements of financial position. In general, the new asset and liability will each equal the present value of lease payments. The guidance does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee. The guidance is effective for the Company in the first quarter of 2019 using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented. Early adoption is permitted. The Company is currently evaluating the effect that adoption will have on its consolidated financial statements.
In January 2016, the FASB issued guidance that changes the classification and measurement of financial instruments and amends certain disclosure requirements associated with the fair value of financial instruments. The amendments revise the accounting related to (a) the classification and measurement of investments in equity

14

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

investments and (b) the presentation of certain fair value changes for financial liabilities measured at fair value. Specifically, the guidance generally requires equity investments to be carried at fair value with changes flowing through net income. This requirement does not apply to equity-method investments. For financial liabilities measured at fair value, the guidance requires fair value changes attributable to instrument-specific credit risk to be presented separately in other comprehensive income, as opposed to reflecting the entire fair-value change in net income. The guidance is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company is currently evaluating the effect that adoption will have on its consolidated financial statements.
In April 2015, the FASB issued guidance that changes the presentation of debt issuance costs in the statements of financial position. Previously, such costs were reflected in the statements of financial position as a deferred asset. The new guidance requires these costs to be presented as a direct deduction from the related debt liability and to be amortized as interest expense. The amendment does not affect the current guidance on the recognition and measurement of debt issuance costs. The Company adopted the guidance in the first quarter of 2016 on a retrospective basis. The adoption resulted in the reclassification of deferred debt issuance costs related to the Company and the consolidated funds, respectively, of $3.6 million and $44.7 million as of December 31, 2015, from other assets to debt obligations in the condensed consolidated statements of financial condition.
In February 2015, the FASB amended its consolidation guidance to end the deferral granted to investment companies with respect to applying VIE guidance. The new guidance does not affect the five characteristics that determine if an entity is a VIE; rather, it focuses on the consolidation criteria used to evaluate whether certain legal entities should be consolidated. Additionally, the new guidance eliminates the presumption that a general partner should consolidate a limited partnership under the voting model. The amendment is intended to simplify the consolidation guidance by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE and providing more clarity for reporting entities that typically make use of limited partnerships or VIEs. The Company adopted the guidance in the first quarter of 2016 on a modified retrospective basis as of January 1, 2016. As a result, prior periods were not recast; instead, a cumulative-effect adjustment to equity as of January 1, 2016 was recorded. The adoption resulted in a reduction to total consolidated assets, liabilities, non-controlling redeemable interests in consolidated funds and unitholders' capital as of January 1, 2016 of $45.7 billion, $7.6 billion, $38.0 billion and $90.6 million, respectively. There was no impact on retained earnings or net income attributable to the Company.
In August 2014, the FASB issued guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the Company in the fourth quarter of 2016, with early adoption permitted. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements.
In August 2014, the FASB issued guidance on measuring the financial assets and financial liabilities of a consolidated collateralized financing entity, such as a CLO. The guidance applies to reporting entities that are required to consolidate a collateralized financing entity under the VIE guidance when (a) the reporting entity measures all of the financial assets and financial liabilities of that consolidated financing entity at fair value in the consolidated financial statements and (b) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. The guidance provides an alternative for measuring the financial assets and financial liabilities of a consolidated collateralized financing entity to eliminate differences in the fair value of those financial assets and financial liabilities as determined under GAAP. The Company adopted the guidance in the first quarter of 2016 on a modified retrospective basis as of January 1, 2016. As a result, prior periods were not recast; instead, a cumulative-effect adjustment to equity as of January 1, 2016 was recorded. The adoption resulted in a reduction to unitholders' capital as of January 1, 2016 of $32.1 million.
In May 2014, the FASB and International Accounting Standards Board issued converged guidance on revenue recognition, which outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most current revenue recognition guidance, including industry-specific guidance. The guidance provides a largely principles-based framework for addressing revenue

15

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

recognition issues on a comprehensive basis, eliminates an entity’s ability to recognize revenue if there is risk of significant reversal, and requires enhanced disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts, including quantitative and qualitative information about significant judgments and changes in those judgments made by management in recognizing revenue. In April and May 2016, the FASB amended certain aspects of the new revenue recognition guidance, including performance obligations, licensing, collectability, noncash consideration and contract modifications. The guidance will be effective for the Company in the first quarter of 2018 on either a full or modified retrospective basis, with early adoption permitted. The Company is currently evaluating the effect that adoption will have on its consolidated financial statements.
3. VARIABLE INTEREST ENTITIES
The Company consolidates VIEs for which it is the primary beneficiary. VIEs include funds managed by Oaktree and CLOs for which Oaktree acts as collateral manager. The purpose of these VIEs is to provide investment opportunities for investors in exchange for management fees and, in certain cases, performance-based allocations. While the investment strategies of the funds and CLOs differ by product, in general the fundamental risks of the funds and CLOs have similar characteristics, including loss of invested capital and reduction or absence of management and performance-based fees. As general partner or collateral manager, respectively, Oaktree generally considers itself the sponsor of the applicable fund or CLO. The Company does not provide performance guarantees and, other than capital commitments, has no financial obligation to provide funding to VIEs.
As discussed in note 2, the Company adopted the new consolidation guidance in the first quarter of 2016 under the modified retrospective approach as of January 1, 2016, which did not require prior periods to be recast. The adoption resulted in the deconsolidation of substantially all of Oaktree’s investment funds as of January 1, 2016.
Consolidated VIEs
As of September 30, 2016, the Company consolidated 18 VIEs for which it was the primary beneficiary, including nine funds managed by Oaktree, eight CLOs for which Oaktree serves as collateral manager, and Oaktree AIF Holdings, Inc., which was formed to hold certain assets for regulatory and other purposes. One of the consolidated funds, Oaktree Enhanced Income Retention Holdings III, LLC, was formed to satisfy risk retention requirements under Section 15G of the Exchange Act. One of the CLOs had not priced as of September 30, 2016. As of December 31, 2015, the Company consolidated eight VIEs pursuant to the consolidation rules then in effect.
As of September 30, 2016, the assets and liabilities of the 17 consolidated VIEs representing funds and CLOs amounted to $4.1 billion and $3.4 billion, respectively. The assets of these consolidated VIEs primarily consisted of investments in debt and equity securities, while their liabilities primarily represented debt obligations issued by CLOs. The assets of these VIEs may be used only to settle obligations of the same VIE. In addition, there is no recourse to the Company for the VIEs’ liabilities. In exchange for managing either the funds’ or CLOs’ collateral, the Company typically earns management fees and may earn performance fees, all of which are eliminated in consolidation. As of September 30, 2016, the Company’s investments in consolidated VIEs had a carrying value of $298.1 million, which represented its maximum risk of loss as of that date. The Company’s investments in CLOs are generally subordinated to other interests in the CLOs and entitle the Company to receive a pro-rata portion of the residual cash flows, if any, from the CLOs. Please see note 9 for more information on CLO debt obligations.
Unconsolidated VIEs
The Company holds variable interests in certain VIEs in the form of direct equity interests that are not consolidated because it is not the primary beneficiary, inasmuch as its fee arrangements are considered at-market and it does not hold interests in those entities that are considered more than insignificant.

16

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

As of September 30, 2016, the assets and liabilities of VIEs that were not consolidated, and the Company’s investments in those VIEs, are shown below. As of December 31, 2015, there were no VIEs for which the Company was not the primary beneficiary pursuant to the consolidation rules then in effect.
Carrying Value as of September 30, 2016
 
 
 
Assets of VIEs
$
49,033,979

Liabilities of VIEs
$
8,759,431

 
 
Corporate investments
$
1,002,937

Due from affiliates
125,596

Maximum exposure to loss
$
1,128,533

4. INVESTMENTS
Corporate Investments
Corporate investments consist of investments in funds and companies in which the Company does not have a controlling financial interest. Investments for which the Company is deemed to exert significant influence are accounted for under the equity method of accounting and reflect Oaktree’s ownership interest in each fund or company. In the case of investments for which the Company is not deemed to exert significant influence or control, the fair value option of accounting has been elected. Investment income represents the Company’s pro-rata share of income or loss from these funds or companies, or the change in fair value of the investment, as applicable. Oaktree’s general partnership interests are substantially illiquid. While investments in funds reflect each respective fund’s holdings at fair value, equity-method investments in DoubleLine Capital LP and its affiliates (collectively, “DoubleLine”) and other companies are not adjusted to reflect the fair value of the underlying company. The fair value of the underlying investments in Oaktree funds is based on the Company’s assessment, which takes into account expected cash flows, earnings multiples and/or comparisons to similar market transactions, among other factors. Valuation adjustments reflecting consideration of credit quality, concentration risk, sales restrictions and other liquidity factors are integral to valuing these instruments.
The Company adopted the new consolidation guidance effective the first quarter of 2016, resulting in the deconsolidation of substantially all of Oaktree’s investment funds. Corporate investments consisted of the following:
 
As of
Corporate Investments:
September 30,
2016
 
December 31,
2015
 
 
 
 
Equity-method Investments:
 
 
 
Oaktree funds
$
923,285

 
$
51,899

Non-Oaktree funds
—

 
65,901

Companies
19,952

 
28,562

Other investments, at fair value
97,757

 
67,626

Total corporate investments
$
1,040,994

 
$
213,988


17

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The components of investment income (loss) are set forth below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Investment Income (Loss):
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Equity-method Investments:
 
 
 
 
 
 
 
Oaktree funds
$
47,323

 
$
(4,872
)
 
$
76,224

 
$
(4,545
)
Non-Oaktree funds
—

 
3,316

 
318

 
8,049

Companies
17,767

 
13,161

 
49,556

 
35,483

Other investments, at fair value
668

 
(1,263
)
 
10,107

 
(269
)
Total investment income
$
65,758

 
$
10,342

 
$
136,205

 
$
38,718

Equity-method Investments
The Company’s equity-method investments include its investments in Oaktree funds for which it serves as general partner, and other third-party funds and companies that are not consolidated for which the Company is deemed to exert significant influence. The Company’s share of income or loss generated by these investments is recorded within investment income in the condensed consolidated statements of operations. The Company’s equity-method investments in Oaktree funds principally reflect the Company’s general partner interests in those funds, which typically does not exceed 2.5% in each fund. The Oaktree funds are investment companies that follow a specialized basis of accounting established by GAAP. Equity-method investments in companies include the Company’s one-fifth equity stake in DoubleLine.
Each reporting period, the Company evaluates each of its equity-method investments to determine if any are considered significant, as defined by the SEC. As of or for the year ended December 31, 2015, no individual equity-method investment met the significance criteria. As a result, separate financial statements were not required for any of the Company’s equity-method investments.
Summarized financial information of the Company’s equity-method investments is set forth below. Equity-method investments were not material for periods prior to adoption of the deconsolidation guidance in the first quarter of 2016, pursuant to the consolidation rules then in effect.
Statement of Financial Condition:
As of
September 30, 2016
Assets:
 
Cash and cash-equivalents
$
3,721,911

Investments, at fair value
42,022,758

Other assets
1,707,581

Total assets
$
47,452,250

Liabilities and Capital:
 
Debt obligations
$
7,529,572

Other liabilities
1,699,642

Total liabilities
9,229,214

Total capital
38,223,036

Total liabilities and capital
$
47,452,250


18

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Statements of Operations:
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Revenues / investment income
$
607,105

 
$
1,632,204

Interest expense
(48,851
)
 
(129,020
)
Other expenses
(207,052
)
 
(644,791
)
Net realized and unrealized gain on investments
1,771,018

 
2,609,742

Net income
$
2,122,220

 
$
3,468,135

Other Investments, at Fair Value
Other investments, at fair value primarily consist of investments in certain Oaktree and non-Oaktree funds for which the fair value option of accounting has been elected, as well as derivatives utilized to hedge the Company’s exposure to investment income earned from unconsolidated funds. The following table summarizes net gains (losses) attributable to the Company’s other investments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Realized gain (loss)
$
104

 
$
—

 
$
(2,285
)
 
$
58

Net change in unrealized gain (loss)
564

 
(1,263
)
 
12,392

 
(327
)
Total
$
668

 
$
(1,263
)
 
$
10,107

 
$
(269
)


19

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Investments of Consolidated Funds
Investments, at Fair Value
Investments held and securities sold short by the consolidated funds are summarized below:
 
Fair Value as of
 
Fair Value as a Percentage of Investments of Consolidated Funds as of
Investments
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
United States:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Consumer discretionary
$
580,562

 
$
3,387,072

 
15.8
%
 
7.5
%
Consumer staples
147,110

 
686,071

 
4.0

 
1.5

Energy
65,339

 
854,220

 
1.8

 
1.9

Financials
153,234

 
1,293,508

 
4.2

 
2.9

Government
—

 
95,508

 
—

 
0.2

Health care
323,849

 
1,135,799

 
8.8

 
2.5

Industrials
339,253

 
1,710,706

 
9.2

 
3.8

Information technology
260,100

 
1,293,815

 
7.1

 
2.9

Materials
215,124

 
1,393,521

 
5.8

 
3.1

Telecommunication services
81,692

 
471,711

 
2.2

 
1.0

Utilities
73,733

 
686,126

 
2.0

 
1.5

Total debt securities (cost: $2,254,149 and $15,304,870 as of September 30, 2016 and December 31, 2015, respectively)
2,239,996

 
13,008,057

 
60.9

 
28.8

Equity securities:
 
 
 

 
 
 
 

Consumer discretionary
680

 
1,813,832

 
0.0

 
4.0

Consumer staples
—

 
872,472

 
—

 
1.9

Energy
1,346

 
1,810,290

 
0.0

 
4.0

Financials
3,625

 
7,639,790

 
0.1

 
16.9

Health care
68

 
92,866

 
0.0

 
0.2

Industrials
1

 
1,728,086

 
0.0

 
3.8

Information technology
—

 
67,253

 
—

 
0.2

Materials
629

 
882,366

 
0.0

 
2.0

Telecommunication services
—

 
16,471

 
—

 
0.0

Utilities
—

 
156,865

 
—

 
0.3

Total equity securities (cost: $7,403 and $13,290,699 as of September 30, 2016 and December 31, 2015, respectively)
6,349

 
15,080,291

 
0.1

 
33.3


20

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
Fair Value as of
 
Fair Value as a Percentage of Investments of Consolidated Funds as of
Investments
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Europe:
 
 
 

 
 
 
 

Debt securities:
 
 
 
 
 
 
 
Consumer discretionary
$
346,746

 
$
1,329,387

 
9.4
%
 
2.9
%
Consumer staples
99,628

 
222,789

 
2.7

 
0.5

Energy
6,111

 
144,742

 
0.2

 
0.3

Financials
10,917

 
808,568

 
0.3

 
1.8

Government
1,792

 
46,946

 
0.0

 
0.1

Health care
185,710

 
197,569

 
5.1

 
0.5

Industrials
64,741

 
291,950

 
1.8

 
0.7

Information technology
6,065

 
71,168

 
0.2

 
0.2

Materials
240,035

 
377,460

 
6.5

 
0.8

Telecommunication services
188,648

 
200,610

 
5.1

 
0.4

Utilities
—

 
18,028

 
—

 
0.0

Total debt securities (cost: $1,139,224 and $4,207,531 as of September 30, 2016 and December 31, 2015, respectively)
1,150,393

 
3,709,217

 
31.3

 
8.2

Equity securities:
 
 
 

 
 
 
 

Consumer discretionary
—

 
270,370

 
—

 
0.6

Consumer staples
—

 
145,108

 
—

 
0.3

Energy
—

 
21,791

 
—

 
0.0

Financials
1,309

 
6,239,424

 
0.0

 
13.8

Government
—

 
40,290

 
—

 
0.1

Health care
—

 
79,582

 
—

 
0.2

Industrials
—

 
1,499,142

 
—

 
3.3

Information technology
—

 
1,646

 
—

 
0.0

Materials
—

 
475,306

 
—

 
1.1

Telecommunication services
—

 
4,834

 
—

 
0.0

Utilities
—

 
344,736

 
—

 
0.8

Total equity securities (cost: $1,466 and $7,627,245 as of September 30, 2016 and December 31, 2015, respectively)
1,309

 
9,122,229

 
0.0

 
20.2

Asia and other:
 
 
 

 
 
 
 

Debt securities:
 
 
 

 
 
 
 

Consumer discretionary
10,384

 
102,531

 
0.3

 
0.2

Consumer staples
2,481

 
33,061

 
0.1

 
0.1

Energy
9,290

 
193,645

 
0.3

 
0.4

Financials
—

 
27,413

 
—

 
0.1

Government
—

 
6,974

 
—

 
0.0

Health care
9,756

 
47,010

 
0.3

 
0.1

Industrials
19,881

 
268,710

 
0.5

 
0.6

Information technology
3,319

 
31,983

 
0.1

 
0.1

Materials
12,317

 
248,830

 
0.3

 
0.6

Utilities
475

 
2,713

 
0.0

 
0.0

Total debt securities (cost: $74,014 and $1,090,867 as of September 30, 2016 and December 31, 2015, respectively)
67,903

 
962,870

 
1.9

 
2.2


21

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
Fair Value as of
 
Fair Value as a Percentage of Investments of Consolidated Funds as of
Investments
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Asia and other:
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 

Consumer discretionary
$
21,147

 
$
506,761

 
0.6
%
 
1.1
%
Consumer staples
5,613

 
29,863

 
0.2

 
0.1

Energy
11,027

 
192,844

 
0.3

 
0.4

Financials
57,038

 
986,753

 
1.5

 
2.2

Health care
2,548

 
18,535

 
0.1

 
0.1

Industrials
43,140

 
1,032,225

 
1.1

 
2.3

Information technology
31,558

 
244,433

 
0.9

 
0.5

Materials
31,614

 
96,326

 
0.9

 
0.2

Telecommunication services
2,348

 
34,678

 
0.1

 
0.1

Utilities
4,429

 
154,824

 
0.1

 
0.3

Total equity securities (cost: $198,896 and $3,370,406 as of September 30, 2016 and December 31, 2015, respectively)
210,462

 
3,297,242

 
5.8

 
7.3

Total debt securities
3,458,292

 
17,680,144

 
94.1

 
39.2

Total equity securities
218,120

 
27,499,762

 
5.9

 
60.8

Total investments, at fair value
$
3,676,412

 
$
45,179,906

 
100.0
%
 
100.0
%
Securities Sold Short
 
 
 
 
 
 
 

Equity securities (proceeds: $54,823 and $102,236 as of September 30, 2016 and December 31, 2015, respectively)
$
(57,133
)
 
$
(91,246
)
 
 
 
 

As of September 30, 2016 and December 31, 2015, no single issuer or investment had a fair value that exceeded 5% of Oaktree’s total consolidated net assets.

22

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Net Gains (Losses) From Investment Activities of Consolidated Funds
Net gains (losses) from investment activities in the condensed consolidated statements of operations consist primarily of realized and unrealized gains and losses on the consolidated funds’ investments (including foreign-exchange gains and losses attributable to foreign-denominated investments and related activities) and other financial instruments. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments. Upon disposition of an investment, unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period.
The following table summarizes net gains (losses) from investment activities:
 
Three Months Ended September 30,
 
2016
 
2015
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
 
 
 
 
 
 
 
Investments and other financial instruments
$
1,267

 
$
56,490

 
$
351,272

 
$
(2,160,995
)
Measurement guidance for CLO liabilities (1) 
—

 
(46,553
)
 
—

 
—

Foreign-currency forward contracts (2) 
368

 
(465
)
 
(60,419
)
 
177,621

Total-return and interest-rate swaps (2) 
(2,395
)
 
683

 
10,129

 
(387,399
)
Options and futures (2) 
(676
)
 
76

 
17,291

 
12,849

Swaptions (2)(3) 
—

 
—

 
(6
)
 
(65
)
Total
$
(1,436
)
 
$
10,231

 
$
318,267

 
$
(2,357,989
)

 
Nine Months Ended September 30,
 
2016
 
2015
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
 
 
 
 
 
 
 
Investments and other financial instruments
$
13,589

 
$
83,913

 
$
1,226,498

 
$
(2,622,650
)
Measurement guidance for CLO liabilities (1) 
—

 
(98,927
)
 
—

 
—

Foreign-currency forward contracts (2) 
(132
)
 
(8
)
 
410,891

 
(141,443
)
Total-return and interest-rate swaps (2) 
(3,285
)
 
(713
)
 
2,955

 
(503,625
)
Options and futures (2) 
(1,525
)
 
(7
)
 
13,314

 
(3,450
)
Swaptions (2)(3) 
—

 
—

 
(3,013
)
 
2,277

Total
$
8,647

 
$
(15,742
)
 
$
1,650,645

 
$
(3,268,891
)
 
 
 
 
 
(1)
Represents the net change in the fair value of CLO liabilities based on the more observable fair value of CLO assets, as measured under the CLO measurement guidance. Please see note 2 for more information.
(2)
Please see note 6 for additional information.
(3)
A swaption is an option granting the buyer the right but not the obligation to enter into a swap agreement on a specified future date.

23

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

5. FAIR VALUE
Fair Value of Financial Assets and Liabilities
The short-term nature of cash and cash-equivalents, receivables and accounts payable causes each of their carrying values to approximate fair value. The fair value of short-term investments included in cash and cash-equivalents is a Level I valuation. The Company’s other financial assets and financial liabilities by fair-value hierarchy level are set forth below. Please see notes 9 and 16 for the fair value of the Company’s outstanding debt obligations and amounts due from/to affiliates, respectively.
 
As of September 30, 2016
 
As of December 31, 2015
 
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and time deposit securities (1) 
$
676,226

 
$
—

 
$
—

 
$
676,226

 
$
661,116

 
$
—

 
$
—

 
$
661,116

Corporate investments
—

 
70,368

 
27,389

 
97,757

 
—

 
41,876

 
25,750

 
67,626

Foreign-currency forward contracts (2) 
—

 
1,452

 
—

 
1,452

 
—

 
5,875

 
—

 
5,875

Total assets
$
676,226

 
$
71,820

 
$
27,389

 
$
775,435

 
$
661,116

 
$
47,751

 
$
25,750

 
$
734,617

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration (3) 
$
—

 
$
—

 
$
(23,741
)
 
$
(23,741
)
 
$
—

 
$
—

 
$
(28,494
)
 
$
(28,494
)
Foreign-currency forward contracts (3) 
—

 
(12,631
)
 
—

 
(12,631
)
 
—

 
(3,286
)
 
—

 
(3,286
)
Interest-rate swaps (3) 
—

 
(338
)
 
—

 
(338
)
 
—

 
(943
)
 
—

 
(943
)
Total liabilities
$
—

 
$
(12,969
)
 
$
(23,741
)
 
$
(36,710
)
 
$
—

 
$
(4,229
)
 
$
(28,494
)
 
$
(32,723
)
 
 
 
 
 
(1)
Carrying value approximates fair value due to the short-term nature.
(2)
Amounts are included in other assets in the condensed consolidated statements of financial condition.
(3)
Amounts are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.
There were no transfers between Level I and Level II positions for the nine months ended September 30, 2016 and 2015.

24

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The table below sets forth a summary of changes in the fair value of Level III financial instruments:

 
Three Months Ended September 30,
 
2016
 
2015
 
Corporate Investments
 
Contingent Consideration Liability
 
Corporate Investments
 
Contingent Consideration Liability
 
 
 
 
 
 
 
 
Beginning balance
$
26,581

 
$
(24,995
)
 
$
—

 
$
(28,746
)
Net gain (loss) included in earnings
808

 
1,254

 
—

 
(432
)
Ending balance
$
27,389

 
$
(23,741
)
 
$
—

 
$
(29,178
)
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) attributable to financial instruments still held at end of period
$
808

 
$
1,254

 
$
—

 
$
(432
)

 
Nine Months Ended September 30,
 
2016
 
2015
 
Corporate Investments
 
Contingent Consideration Liability
 
Corporate Investments
 
Contingent Consideration Liability
 
 
 
 
 
 
 
 
Beginning balance
$
25,750

 
$
(28,494
)
 
$
—

 
$
(27,245
)
Net gain (loss) included in earnings
1,639

 
4,753

 
—

 
(1,933
)
Ending balance
$
27,389

 
$
(23,741
)
 
$
—

 
$
(29,178
)
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) attributable to financial instruments still held at end of period
$
1,639

 
$
4,753

 
$
—

 
$
(1,933
)

The table below sets forth a summary of the valuation techniques and quantitative information utilized in determining the fair value of the Company’s Level III financial instruments:
 
 
Fair Value as of
 
 
 
Significant Unobservable Input
 
 
 
 
Financial Instrument
 
September 30, 2016
 
December 31, 2015
 
Valuation Technique
 
 
Range
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate investment – Limited partnership interests
 
$
27,389

 
$
25,750

 
Market approach
(value of underlying assets)
 
Not applicable
 
Not applicable
 
Not applicable
Contingent consideration liability
 
(23,741
)
 
(28,494
)
 
Discounted cash flow
 
Assumed % of total potential contingent payments
 
0% – 100%
 
45%


25

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Fair Value of Financial Instruments Held By Consolidated Funds
The short-term nature of cash and cash-equivalents held at the consolidated funds causes their carrying value to approximate fair value. The fair value of cash-equivalents is a Level I valuation. Derivatives may relate to a mix of Level I, II or III investments, and therefore their fair-value hierarchy level may not correspond to the fair-value hierarchy level of the economically hedged investment. The table below summarizes the investments and other financial instruments of the consolidated funds by fair-value hierarchy level:
 
As of September 30, 2016
 
As of December 31, 2015
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt – bank debt
$
—

 
$
2,779,496

 
$
199,974

 
$
2,979,470

 
$
—

 
$
7,891,929

 
$
1,871,375

 
$
9,763,304

Corporate debt – all other
—

 
470,144

 
8,678

 
478,822

 
5,450

 
4,902,226

 
3,009,164

 
7,916,840

Equities – common stock
211,768

 
27

 
6,325

 
218,120

 
4,836,422

 
256,604

 
8,729,202

 
13,822,228

Equities – preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
1,363,542

 
1,363,542

Real estate
—

 
—

 
—

 
—

 
61,317

 
—

 
9,655,270

 
9,716,587

Real estate loan portfolios
—

 
—

 
—

 
—

 
—

 
—

 
2,597,405

 
2,597,405

Total investments
211,768

 
3,249,667

 
214,977

 
3,676,412

 
4,903,189

 
13,050,759

 
27,225,958

 
45,179,906

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign-currency forward contracts
—

 
1

 
—

 
1

 
—

 
156,234

 
—

 
156,234

Swaps
—

 
155

 
—

 
155

 
—

 
16,544

 
—

 
16,544

Options and futures
29

 
—

 
—

 
29

 
—

 
25,559

 
—

 
25,559

Swaptions
—

 
—

 
—

 
—

 
—

 
14

 
—

 
14

Total derivatives
29

 
156

 
—

 
185

 
—

 
198,351

 
—

 
198,351

Total assets
$
211,797

 
$
3,249,823

 
$
214,977

 
$
3,676,597

 
$
4,903,189

 
$
13,249,110

 
$
27,225,958

 
$
45,378,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLO debt obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior secured notes (1) 
$
—

 
$
(2,735,336
)
 
$
—

 
$
(2,735,336
)
 
$
—

 
$
—

 
$
—

 
$
—

Subordinated notes (1) 
—

 
(104,916
)
 
—

 
(104,916
)
 
—

 
—

 
—

 
—

Total CLO debt obligations
—

 
(2,840,252
)
 
—

 
(2,840,252
)
 
—

 
—

 
—

 
—

Securities sold short:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
(57,133
)
 
—

 
—

 
(57,133
)
 
(91,246
)
 
—

 
—

 
(91,246
)
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign-currency forward contracts
—

 
(62
)
 
—

 
(62
)
 
—

 
(64,364
)
 
—

 
(64,364
)
Swaps
—

 
(393
)
 
—

 
(393
)
 
—

 
(223,359
)
 
(8,251
)
 
(231,610
)
Options and futures
(61
)
 
—

 
—

 
(61
)
 
(88
)
 
(4,146
)
 
—

 
(4,234
)
Total derivatives
(61
)
 
(455
)
 
—

 
(516
)
 
(88
)
 
(291,869
)
 
(8,251
)
 
(300,208
)
Total liabilities
$
(57,194
)
 
$
(2,840,707
)
 
$
—

 
$
(2,897,901
)
 
$
(91,334
)
 
$
(291,869
)
 
$
(8,251
)
 
$
(391,454
)
 
 
 
 
 
(1)
The fair value of CLO liabilities is classified based on the more observable fair value of CLO assets. Please see notes 2 and 9 for more information.

26

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The following tables set forth a summary of changes in the fair value of Level III investments:
 
 
Corporate Debt – Bank Debt
 
Corporate Debt – All Other
 
Equities – Common Stock
 
Equities – Preferred Stock
 
Real Estate
 
Real Estate Loan Portfolios
 
Swaps
 
Other
 
Total
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
189,909

 
$
1,890

 
$
3,974

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
195,773

Transfers into Level III
20,684

 
—

 
2,691

 
—

 
—

 
—

 
—

 
—

 
23,375

Transfers out of Level III
(765
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(765
)
Purchases
5,178

 
6,808

 
1,144

 
—

 
—

 
—

 
—

 
—

 
13,130

Sales
(19,918
)
 
(2
)
 
(1,791
)
 
—

 
—

 
—

 
—

 
—

 
(21,711
)
Realized gains (losses), net
132

 
—

 
(22
)
 
—

 
—

 
—

 
—

 
—

 
110

Unrealized appreciation (depreciation), net
4,754

 
(18
)
 
329

 
—

 
—

 
—

 
—

 
—

 
5,065

Ending balance
$
199,974

 
$
8,678

 
$
6,325

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
214,977

Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period
$
4,754

 
$
(18
)
 
$
329

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
5,065

Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,399,277

 
$
2,915,374

 
$
9,703,009

 
$
1,659,738

 
$
9,572,902

 
$
2,779,472

 
$
(8,644
)
 
$
4,396

 
$
28,025,524

Transfers into Level III
123,811

 
—

 
175,304

 
—

 
128,261

 
—

 
—

 
—

 
427,376

Transfers out of Level III
(2,667
)
 
(136,524
)
 
(674,001
)
 
(109
)
 
—

 
—

 
—

 
—

 
(813,301
)
Purchases
329,452

 
244,669

 
90,460

 
50,818

 
361,312

 
513,272

 
—

 
—

 
1,589,983

Sales
(31,431
)
 
(84,072
)
 
(560,077
)
 
(5,192
)
 
(256,571
)
 
(188,245
)
 
—

 
—

 
(1,125,588
)
Realized gains (losses), net
12,070

 
359

 
186,815

 
1,658

 
99,539

 
66,345

 
—

 
—

 
366,786

Unrealized appreciation (depreciation), net
(13,651
)
 
(5,814
)
 
(146,695
)
 
(23,556
)
 
30,287

 
(53,288
)
 
(4,040
)
 
334

 
(216,423
)
Ending balance
$
1,816,861

 
$
2,933,992

 
$
8,774,815

 
$
1,683,357

 
$
9,935,730

 
$
3,117,556

 
$
(12,684
)
 
$
4,730

 
$
28,254,357

Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period
$
(6,205
)
 
$
(24,711
)
 
$
(286,881
)
 
$
97,407

 
$
105,450

 
$
(38,805
)
 
$
(4,039
)
 
$
334

 
$
(157,450
)


27

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
 
Corporate Debt – Bank Debt
 
Corporate Debt – All Other
 
Equities – Common Stock
 
Equities – Preferred Stock
 
Real Estate
 
Real Estate Loan Portfolios
 
Swaps
 
Other
 
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,871,375

 
$
3,009,164

 
$
8,729,202

 
$
1,363,542

 
$
9,655,270

 
$
2,597,405

 
$
(8,251
)
 
$
—

 
$
27,217,707

Cumulative-effect adjustment from adoption of accounting guidance
(1,672,305
)
 
(3,007,287
)
 
(8,725,026
)
 
(1,363,542
)
 
(9,655,270
)
 
(2,597,405
)
 
8,251

 
—

 
(27,012,584
)
Transfers into Level III
58,219

 
—

 
3,089

 
—

 
—

 
—

 
—

 
—

 
61,308

Transfers out of Level III
(43,435
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(43,435
)
Purchases
14,556

 
6,810

 
1,301

 
—

 
—

 
—

 
—

 
—

 
22,667

Sales
(32,790
)
 
(2
)
 
(2,612
)
 
—

 
—

 
—

 
—

 
—

 
(35,404
)
Realized gains (losses), net
247

 
—

 
(22
)
 
—

 
—

 
—

 
—

 
—

 
225

Unrealized appreciation (depreciation), net
4,107

 
(7
)
 
393

 
—

 
—

 
—

 
—

 
—

 
4,493

Ending balance
$
199,974

 
$
8,678

 
$
6,325

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
214,977

Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period
$
4,107

 
$
(7
)
 
$
393

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4,493

Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,555,656

 
$
2,750,661

 
$
9,056,579

 
$
1,320,752

 
$
9,216,056

 
$
2,399,105

 
$
(10,687
)
 
$
3,576

 
$
26,291,698

Transfers into Level III
240,344

 
17,208

 
552,867

 
15,835

 
128,261

 
—

 
—

 
—

 
954,515

Transfers out of Level III
(148,665
)
 
(246,608
)
 
(1,197,424
)
 
(32,692
)
 
—

 
—

 
—

 
—

 
(1,625,389
)
Purchases
554,203

 
811,132

 
1,284,587

 
255,946

 
1,310,886

 
1,119,187

 
—

 
—

 
5,335,941

Sales
(372,198
)
 
(247,423
)
 
(1,002,296
)
 
(60,139
)
 
(1,241,926
)
 
(491,632
)
 
—

 
—

 
(3,415,614
)
Realized gains (losses), net
37,477

 
(32,140
)
 
120,689

 
39,042

 
578,596

 
164,973

 
—

 
—

 
908,637

Unrealized appreciation (depreciation), net
(49,956
)
 
(118,838
)
 
(40,187
)
 
144,613

 
(56,143
)
 
(74,077
)
 
(1,997
)
 
1,154

 
(195,431
)
Ending balance
$
1,816,861

 
$
2,933,992

 
$
8,774,815

 
$
1,683,357

 
$
9,935,730

 
$
3,117,556

 
$
(12,684
)
 
$
4,730

 
$
28,254,357

Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period
$
(23,824
)
 
$
(68,639
)
 
$
(72,798
)
 
$
206,869

 
$
197,926

 
$
(74,077
)
 
$
(1,996
)
 
$
1,154

 
$
164,615


Total realized and unrealized gains and losses recorded for Level III investments are included in net realized gain on consolidated funds’ investments or net change in unrealized appreciation (depreciation) on consolidated funds’ investments in the condensed consolidated statements of operations.
There were no transfers between Level I and Level II positions for the nine months ended September 30, 2016 and 2015.

28

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Transfers out of Level III are generally attributable to certain investments that experienced a more significant level of market trading activity or completed an initial public offering during the respective period and thus were valued using observable inputs. Transfers into Level III typically reflect either investments that experienced a less significant level of market trading activity during the period or portfolio companies that undertook restructurings or bankruptcy proceedings and thus were valued in the absence of observable inputs.
The following table sets forth a summary of the valuation techniques and quantitative information utilized in determining the fair value of the consolidated funds’ Level III investments as of September 30, 2016:
Investment Type
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs (9)(10)(11)
 
Range
 
Weighted Average (12)
 
 
 
 
 
 
 
 
 
 
 
Credit-oriented investments:
 
 
 
 
 
 
 
 
 
 
Consumer
   discretionary:
 
$
7,710

 
Discounted cash flow (1)
 
Discount rate
 
5% – 15%
 
8%
 
 
54,270

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
Consumer Staples:
 
7,445

 
Discounted cash flow (1)
 
Discount rate
 
6% – 10%
 
7%
 
 
17,795

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
Energy:
 
12,720

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
Industrials:
 
10,624

 
Discounted cash flow (1)
 
Discount rate
 
5% – 7%
 
6%
 
 
4,237

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
5x - 7x
 
6x
 
 
29,713

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
Information
technology:
 
11,699

 
Discounted cash flow (1)
 
Discount rate
 
6% – 12%
 
8%
Materials:
 
1,206

 
Discounted cash flow (1)
 
Discount rate
 
10% – 12%
 
11%
 
 
11,117

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
Other:
 
5,304

 
Discounted cash flow (1)
 
Discount rate
 
9% – 16%
 
12%
 
 
25,638

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
 
 
9,174

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
Equity investments:
 
 
 
 
 
 
 
 
 
 
 
 
3,521

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
4x – 10x
 
8x
 
 
1,245

 
Discounted cash flow (1)
 
Discount rate
 
11% – 30%
 
13%
 
 
1,559

 
Recent market information (6)
 
Quoted prices
 
Not applicable
 
Not applicable
Total Level III
investments
 
$
214,977

 
 
 
 
 
 
 
 



29

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The following table sets forth a summary of the valuation techniques and quantitative information utilized in determining the fair value of the consolidated funds’ Level III investments as of December 31, 2015:
Investment Type
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs (9)(10)(11)
 
Range
 
Weighted Average (12)
 
 
 
 
 
 
 
 
 
 
 
Credit-oriented investments:
 
 
 
 
 
 
 
 
 
 
Consumer
discretionary:
 
$
289,107

 
Discounted cash flow (1)
 
Discount rate
 
5% – 15%
 
12%
 
 
451,584

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
3x – 10x
 
6x
 
 
232,995

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
156,160

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Financials:
 
595,066

 
Discounted cash flow (1)
 
Discount rate
 
6% – 14%
 
11%
 
 
259,669

 
Market approach
(value of underlying assets) (2)(4)
 
Underlying asset multiple
 
1.1x – 1.5x
 
1.2x
 
 
232,958

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
241,667

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Industrials:
 
135,808

 
Discounted cash flow (1)
 
Discount rate
 
5% – 15%
 
13%
 
 
55,310

 
Discounted cash flow (1) /
Sales approach (8)
 
Discount rate / Market transactions
 
9% – 11%
 
10%
 
 
7,549

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
5x – 9x
 
7x
 
 
219,121

 
Market approach
(value of underlying assets) (2)(4)
 
Underlying asset multiple
 
0.7x – 1.0x
 
0.9x
 
 
45,647

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
24,247

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Materials:
 
417,749

 
Discounted cash flow (1)
 
Discount rate
 
11% – 14%
 
14%
 
 
128,230

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
7x – 9x
 
8x
 
 
3,938

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
71,174

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Information
technology:
 
199,841

 
Discounted cash flow (1)
 
Discount rate
 
6% – 13%
 
12%
 
 
143,596

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
6x – 8x
 
7x
 
 
63,594

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
62,353

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Other:
 
442,797

 
Discounted cash flow (1)
 
Discount rate
 
5% – 20%
 
12%
 
 
60,643

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
331,485

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable

30

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Investment Type
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs (9)(10)(11)
 
Range
 
Weighted Average (12)
 
 
 
 
 
 
 
 
 
 
 
Equity investments:
 
 
 
 
 
 
 
 
 
 
Financials:
 
58,352

 
Discounted cash flow (1)
 
Discount rate
 
14% – 16%
 
15%
 
 
1,029,904

 
Market approach
(value of underlying assets) (2)(4)
 
Underlying asset multiple
 
1.0x – 1.5x
 
1.4x
 
 
189,714

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
Industrials:
 
37,130

 
Discounted cash flow (1)
 
Discount rate
 
10% – 12%
 
11%
 
 
2,385,995

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
5x – 18x
 
9x
 
 
1,287,791

 
Market approach
(value of underlying assets) (2)(4)
 
Underlying asset multiple
 
0.9x – 1.0x
 
1.0x
 
 
248,894

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
53,005

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Materials:
 
1,238,760

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
7x – 9x
 
8x
 
 
25,133

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
Utilities
 
616,596

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
8x – 11x
 
9x
 
 
266,185

 
Other
 
Not applicable
 
Not applicable
 
Not applicable
 
 
200,112

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
Other:
 
1,898,334

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
6x – 18x
 
10x
 
 
164,026

 
Market approach
(value of underlying assets) (2)(4)
 
Underlying asset multiple
 
1.1x – 1.3x
 
1.2x
 
 
221,350

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
171,463

 
Recent market information (6)
 
Quoted prices / discount
(discount not applicable)
 
Not applicable
 
Not applicable
Real estate-oriented investments:
 
 
 
 
 
 
 
 
 
 
 
 
3,863,639

 
Discounted cash flow (1)(7)
 
Discount rate
 
6% – 44%
 
13%
 
 
 
 
 
 
Terminal capitalization rate
 
5% – 10%
 
7%
 
 
 
 
 
 
Direct capitalization rate
 
5% – 10%
 
7%
 
 
 
 
 
 
Net operating income growth rate
 
0% – 38%
 
10%
 
 
 
 
 
 
Absorption rate
 
25% – 44%
 
30%
 
 
132,640

 
Discounted cash flow (1) /
Sales approach (8)
 
Discount rate / Market transactions
 
6% – 8%
 
7%
 
 
218,817

 
Market approach
(comparable companies) (2)
 
Earnings multiple (3)
 
9x – 11x
 
11x
 
 
992,695

 
Market approach
(value of underlying assets) (2)(4)
 
Underlying asset multiple
 
1x – 1.8x
 
1.6x
 
 
512,120

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
2,385,895

 
Recent market information (6)
 
Quoted prices / discount
 
0% – 5%
 
3%
 
 
1,385,418

 
Sales approach (8)
 
Market transactions
 
Not applicable
 
Not applicable
 
 
164,046

 
Other
 
Not applicable
 
Not applicable
 
Not applicable
Real estate loan portfolios:
 
 
 
 
 
 
 
 
 
 
 
 
2,101,463

 
Discounted cash flow (1)(7)
 
Discount rate
 
7% – 23%
 
13%
 
 
495,942

 
Recent transaction price (5)
 
Not applicable
 
Not applicable
 
Not applicable
 
 
 
 
 
 
 
 
 
 
 
Total Level III
investments
 
$
27,217,707

 
 
 
 
 
 
 
 



31

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
 
 
 
 
(1)
A discounted cash-flow method is generally used to value performing credit-oriented investments in which the consolidated funds do not have a controlling interest in the underlying issuer, as well as certain equity investments, real estate-oriented investments and real estate loan portfolios.
(2)
A market approach is generally used to value distressed investments and investments in which the consolidated funds have a controlling interest in the underlying issuer.
(3)
Earnings multiples are based on comparable public companies and transactions with comparable companies. The Company typically utilizes multiples of EBITDA; however, in certain cases the Company may use other earnings multiples believed to be most relevant to the investment. The Company typically applies the multiple to trailing twelve-months’ EBITDA. However, in certain cases other earnings measures, such as pro forma EBITDA, may be utilized if deemed to be more relevant.
(4)
A market approach using the value of underlying assets utilizes a multiple, based on comparable companies, of underlying assets or the net book value of the portfolio company. The Company typically obtains the value of underlying assets from the underlying portfolio company’s financial statements or from pricing vendors. The Company may value the underlying assets by using prices and other relevant information from market transactions involving comparable assets.
(5)
Certain investments are valued based on recent transactions, generally defined as investments purchased or sold within nine months of the valuation date. The fair value may also be based on a pending transaction expected to close after the valuation date.
(6)
Certain investments are valued using quoted prices for the subject or similar securities.  Generally, investments valued in this manner are classified as Level III because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions.
(7)
The discounted cash flow model for certain real estate-oriented investments and certain real estate loan portfolios contains a sell-out analysis. In these cases, the discounted cash flow is based on the expected timing and prices of sales of the underlying properties. The Company’s determination of the sales prices of these properties typically includes consideration of prices and other relevant information from market transactions involving comparable properties.
(8)
The sales approach uses prices and other relevant information generated by market transactions involving comparable assets. The significant unobservable inputs used in the sales approach generally include adjustments to transactions involving comparable assets or properties, adjustments to external or internal appraised values, and the Company’s assumptions regarding market trends or other relevant factors.
(9)
The discount rate is the significant unobservable input used in the fair-value measurement of performing credit-oriented investments in which the consolidated funds do not have a controlling interest in the underlying issuer, as well as certain equity investments and real estate loan portfolios. An increase (decrease) in the discount rate would result in a lower (higher) fair-value measurement.
(10)
Multiple of either earnings or underlying assets is the significant unobservable input used in the market approach for the fair-value measurement of distressed credit-oriented investments, credit-oriented investments in which the consolidated funds have a controlling interest in the underlying issuer, equity investments and certain real estate-oriented investments. An increase (decrease) in the multiple would result in a higher (lower) fair-value measurement.
(11)
The significant unobservable inputs used in the fair-value measurement of real estate investments utilizing a discounted cash flow analysis can include one or more of the following: discount rate, terminal capitalization rate, direct capitalization rate, net operating income growth rate or absorption rate. An increase (decrease) in a discount rate, terminal capitalization rate or direct capitalization rate would result in a lower (higher) fair-value measurement. An increase (decrease) in a net operating income growth rate or absorption rate would result in a higher (lower) fair-value measurement. Generally, a change in a net operating income growth rate or absorption rate would be accompanied by a directionally similar change in the discount rate.
(12)
The weighted average is based on the fair value of the investments included in the range.
A significant amount of judgment may be required when using unobservable inputs, including assessing the accuracy of source data and the results of pricing models. The Company assesses the accuracy and reliability of the sources it uses to develop unobservable inputs. These sources may include third-party vendors that the Company believes are reliable and commonly utilized by other marketplace participants. As described in note 2, other factors beyond the unobservable inputs described above may have a significant impact on investment valuations.
During the nine months ended September 30, 2016, the valuation technique for one Level III credit-oriented investment changed from a discounted cash flow to a market approach based on comparable companies due to the anticipated restructuring of the portfolio company.
During the nine months ended September 30, 2015, the valuation technique for ten Level III investments changed, as follows: (a) three credit-oriented investments and one equity investment changed from a market approach based on comparable companies to a market approach based on the value of underlying assets as a result of an increased focus on the value of the company’s physical assets, (b) one equity investment changed from a market approach based on comparable companies to a valuation based on recent market information due to increased availability of broker quotations, (c) one credit-oriented investment changed from a valuation technique that used both a discounted cash flow and sales approach to an approach based solely on a discounted cash flow technique due to a decreased focus on the value of the issuer’s assets, (d) one real estate-oriented investment changed from a valuation based on a market approach to a discounted cash flow as a result of the stabilization of the underlying property, (e) one real estate-oriented investment changed from a valuation based on a discounted cash flow to a sales approach as a result of receiving offers from potential buyers, (f) one credit-oriented investment changed from a valuation based on recent market information to a discounted cash flow technique due to decreased availability of broker quotations, and (g) one credit-oriented investment, comprised of ten underlying

32

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

loans, changed from a valuation technique that used both a discounted cash flow and sales approach to a market approach based on the value of underlying assets as a result of an increased focus on the value of the assets collateralizing the loans.
6. DERIVATIVES AND HEDGING
The Company enters into derivatives as part of its overall risk management strategy or to facilitate its investment management activities. Risks associated with fluctuations in interest rates and foreign-currency exchange rates in the normal course of business are addressed as part of the Company’s overall risk management strategy that may include the use of derivatives to economically hedge or reduce these exposures. From time to time, the Company may enter into (a) foreign-currency option and forward contracts to reduce earnings and cash-flow volatility associated with changes in foreign-currency exchange rates, and (b) interest-rate swaps to manage all or a portion of the interest-rate risk associated with its variable-rate borrowings. As a result of the use of these or other derivative contracts, the Company is exposed to the risk that counterparties will fail to fulfill their contractual obligations. The Company attempts to mitigate this counterparty risk by entering into derivative contracts only with major financial institutions that have investment-grade credit ratings. Counterparty credit risk is evaluated in determining the fair value of derivatives.
As of September 30, 2016, the Company had one interest-rate swap outstanding, expiring in January 2017, that was designated to hedge the interest-rate risk of the $150.0 million outstanding principal balance remaining under the $250.0 million variable-rate bank term loan.  As of September 30, 2016, the hedge continued to be effective. As of December 31, 2015, the Company had an additional interest-rate swap that expired in January 2016 and was designated to hedge the interest-rate risk covering up to $150.0 million of the same bank term loan.
Freestanding derivatives are financial instruments that the Company enters into as part of its overall risk management strategy but does not designate as hedging instruments for accounting purposes. These financial instruments may include foreign-currency exchange contracts, interest-rate swaps and other derivative contracts.
The fair value of foreign-currency forward sell contracts consisted of the following:
As of September 30, 2016
Contract 
Amount in
Local Currency
 
Contract 
Amount in
U.S. Dollars
 
Market 
Value in
U.S. Dollars
 
Net Unrealized
Appreciation
(Depreciation)
 
 
 
 
 
 
 
 
Euro, expiring 10/7/16-9/29/17
256,550

 
$
289,084

 
$
290,964

 
$
(1,880
)
USD (buy GBP), expiring 10/31/16-11/30/17
91,399

 
91,399

 
101,167

 
(9,768
)
Japanese Yen, expiring 10/31/16
5,456,400

 
54,335

 
53,866

 
469

Total
 
 
$
434,818

 
$
445,997

 
$
(11,179
)
 
 
 
 
 
 
 
 
As of December 31, 2015
 

 
 

 
 

 
 

Euro, expiring 1/8/16-12/30/16
246,850

 
$
274,135

 
$
269,603

 
$
4,532

USD (buy GBP), expiring 1/8/16-10/31/16
70,594

 
70,594

 
72,476

 
(1,882
)
Japanese Yen, expiring 1/29/16-9/30/16
5,840,300

 
48,631

 
48,692

 
(61
)
Total
 
 
$
393,360

 
$
390,771

 
$
2,589


33

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Realized and unrealized gains and losses arising from freestanding derivative instruments were recorded in the condensed consolidated statements of operations as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Foreign-currency Forward Contracts
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Investment income
$
(802
)
 
$
—

 
$
(3,173
)
 
$
—

General and administrative expense (1) 
(5,284
)
 
(4,452
)
 
(23,396
)
 
18,389

Total
$
(6,086
)
 
$
(4,452
)
 
$
(26,569
)
 
$
18,389

 
 
 
 
 
(1)
To the extent that the Company’s freestanding derivatives are utilized to hedge its foreign-currency exposure to investment income and management fees earned from consolidated funds, the related hedged items are eliminated in consolidation, with the derivative impact (a positive number reflects a reduction in expenses) reflected in consolidated general and administrative expense.
As of September 30, 2016 and December 31, 2015, the Company had not designated any derivatives as fair-value hedges or hedges of net investments in foreign operations.
Derivatives Held By Consolidated Funds
Certain consolidated funds utilize derivatives in their ongoing investment operations. These derivatives primarily consist of foreign-currency forward contracts and options utilized to manage currency risk, interest-rate swaps to hedge interest-rate risk, options and futures used to hedge certain exposures for specific securities, and total-return swaps utilized mainly to obtain exposure to leveraged loans or to participate in foreign markets not readily accessible. The primary risk exposure for options and futures is price, while the primary risk exposure for total-return swaps is credit. None of the derivative instruments is accounted for as a hedging instrument utilizing hedge accounting.
The impact of derivatives held by the consolidated funds in the condensed consolidated statements of operations was as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
 
 
 
 
 
 
 
Foreign-currency forward contracts
$
368

 
$
(465
)
 
$
(60,419
)
 
$
177,621

Total-return and interest-rate swaps
(2,395
)
 
683

 
10,129

 
(387,399
)
Options and futures
(676
)
 
76

 
17,291

 
12,849

Swaptions
—

 
—

 
(6
)
 
(65
)
Total
$
(2,703
)
 
$
294

 
$
(33,005
)
 
$
(196,994
)


34

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
Nine Months Ended September 30,
 
2016
 
2015
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
Net Realized Gain (Loss) on Investments
 
Net Change in Unrealized Appreciation (Depreciation) on Investments
 
 
 
 
 
 
 
 
Foreign-currency forward contracts
$
(132
)
 
$
(8
)
 
$
410,891

 
$
(141,443
)
Total-return and interest-rate swaps
(3,285
)
 
(713
)
 
2,955

 
(503,625
)
Options and futures
(1,525
)
 
(7
)
 
13,314

 
(3,450
)
Swaptions
—

 
—

 
(3,013
)
 
2,277

Total
$
(4,942
)
 
$
(728
)
 
$
424,147

 
$
(646,241
)

Balance Sheet Offsetting
The Company recognizes all derivatives as assets or liabilities at fair value in its condensed consolidated statements of financial condition. In connection with its derivative activities, the Company generally enters into agreements subject to enforceable master netting arrangements that allow the Company to offset derivative assets and liabilities in the same currency by specific derivative type or, in the event of default by the counterparty, to offset derivative assets and liabilities with the same counterparty. While these derivatives are eligible to be offset in accordance with applicable accounting guidance, the Company has elected to present derivative assets and liabilities based on gross fair value in its condensed consolidated statements of financial condition. The table below sets forth the setoff rights and related arrangements associated with derivatives held by the Company. The “gross amounts not offset in statements of financial condition” columns represent derivatives that management has elected not to offset in the consolidated statements of financial condition even though they are eligible to be offset in accordance with applicable accounting guidance.
 
Gross and Net Amounts of Assets (Liabilities) Presented
 
Gross Amounts Not Offset in Statements of Financial Condition
 
Net Amount
As of September 30, 2016
 
Derivative Assets (Liabilities)
 
Cash Collateral Received (Pledged)
 
Derivative Assets:
 
 
 
 
 
 
 
Foreign-currency forward contracts
$
1,452

 
$
1,452

 
$
—

 
$
—

Derivative assets of consolidated funds:
 
 
 
 
 
 
 
Foreign-currency forward contracts
1

 
1

 
—

 
—

Total-return and interest-rate swaps
155

 
155

 
—

 
—

Options and futures
29

 
14

 
—

 
15

Subtotal
185

 
170

 
—

 
15

Total
$
1,637

 
$
1,622

 
$
—

 
$
15

 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
Foreign-currency forward contracts
$
(12,631
)
 
$
(1,452
)
 
$
—

 
$
(11,179
)
Interest-rate swaps
(338
)
 
—

 
—

 
(338
)
Subtotal
(12,969
)
 
(1,452
)
 
—

 
(11,517
)
Derivative liabilities of consolidated funds:
 
 
 
 
 
 
 
Foreign-currency forward contracts
(62
)
 
(1
)
 
—

 
(61
)
Total-return and interest-rate swaps
(393
)
 
(155
)
 
(238
)
 
—

Options and futures
(61
)
 
(14
)
 
(47
)
 
—

Subtotal
(516
)
 
(170
)
 
(285
)
 
(61
)
Total
$
(13,485
)
 
$
(1,622
)
 
$
(285
)
 
$
(11,578
)

35

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
Gross and Net Amounts of Assets (Liabilities) Presented
 
Gross Amounts Not Offset in Statements of Financial Condition
 
Net Amount
As of December 31, 2015
 
Derivative Assets (Liabilities)
 
Cash Collateral Received (Pledged)
 
Derivative Assets:
 
 
 
 
 
 
 
Foreign-currency forward contracts
$
5,875

 
$
2,047

 
$
—

 
$
3,828

Derivative assets of consolidated funds:
 
 
 
 
 
 
 
Foreign-currency forward contracts
156,234

 
38,033

 
—

 
118,201

Total-return and interest-rate swaps
16,544

 
4,526

 
—

 
12,018

Options and futures
25,559

 
5,665

 
—

 
19,894

Swaptions
14

 
14

 
—

 
—

Subtotal
198,351

 
48,238

 
—

 
150,113

Total
$
204,226

 
$
50,285

 
$
—

 
$
153,941

 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
Foreign-currency forward contracts
$
(3,286
)
 
$
(2,047
)
 
$
—

 
$
(1,239
)
Interest-rate swaps
(943
)
 
—

 
—

 
(943
)
Subtotal
(4,229
)
 
(2,047
)
 
—

 
(2,182
)
Derivative liabilities of consolidated funds:
 
 
 
 
 
 
 
Foreign-currency forward contracts
(64,364
)
 
(38,788
)
 
—

 
(25,576
)
Total-return and interest-rate swaps
(231,610
)
 
(5,304
)
 
(202,677
)
 
(23,629
)
Options and futures
(4,234
)
 
(4,146
)
 
(88
)
 
—

Subtotal
(300,208
)
 
(48,238
)
 
(202,765
)
 
(49,205
)
Total
$
(304,437
)
 
$
(50,285
)
 
$
(202,765
)
 
$
(51,387
)

7. FIXED ASSETS
Fixed assets, which consist of furniture and equipment, capitalized software, office leasehold improvements, company-owned aircraft and acquired intangibles, are included in other assets in the condensed consolidated statements of financial position. In September 2016, the Company entered into a purchase contract and made a deposit for a new airplane to be delivered in 2017, at which time it plans to sell its existing airplane. In connection with its planned sale, in the third quarter of 2016 the Company recorded a $4.4 million impairment charge on the existing airplane.
The following table sets forth the Company’s fixed assets and accumulated depreciation:
 
As of
 
September 30,
2016
 
December 31,
2015
 
 
 
 
Furniture, equipment and capitalized software
$
18,922

 
$
16,820

Leasehold improvements
47,960

 
43,107

Corporate aircraft
66,277

 
12,439

Other
3,465

 
3,295

Fixed assets
136,624

 
75,661

Accumulated depreciation
(43,011
)
 
(36,394
)
Fixed assets, net
$
93,613

 
$
39,267



36

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

8. GOODWILL AND INTANGIBLES
Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired businesses. Goodwill has an indefinite useful life and is not amortized, but instead is tested for impairment annually in the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that impairment may have occurred. As of both September 30, 2016 and December 31, 2015, the Company had $69.3 million of goodwill.
The following table summarizes the carrying value of intangible assets:
 
As of
 
September 30, 2016
 
December 31, 2015
 
 
 
 
Contractual rights
$
28,017

 
$
28,017

Accumulated amortization
(8,673
)
 
(5,671
)
Intangible assets, net
$
19,344

 
$
22,346

Amortization expense associated with the Company's intangible assets was $1.0 million for both the three months ended September 30, 2016 and 2015, and $3.0 million for both the nine months ended September 30, 2016 and 2015. Amortization expense for the remaining three months of 2016 and each of the years ended December 31, 2017–2020, is estimated to be $1.0 million and $4.0 million per annum, respectively.
Goodwill and intangible assets are included in other assets in the condensed consolidated statements of financial position.
9. DEBT OBLIGATIONS AND CREDIT FACILITIES
The Company’s debt obligations are set forth below:
 
As of
 
September 30, 2016
 
December 31,
2015
 
 
 
 
$50,000, 6.09%, issued in June 2006, matured on June 6, 2016
$
—

 
$
50,000

$50,000, 5.82%, issued in November 2006, payable on November 8, 2016
50,000

 
50,000

$250,000, 6.75%, issued in November 2009, payable on December 2, 2019
250,000

 
250,000

$250,000, rate as described below, term loan issued in March 2014, payable on March 31, 2021
150,000

 
250,000

$50,000, 3.91%, issued in September 2014, payable on September 3, 2024
50,000

 
50,000

$100,000, 4.01%, issued in September 2014, payable on September 3, 2026
100,000

 
100,000

$100,000, 4.21%, issued in September 2014, payable on September 3, 2029
100,000

 
100,000

$100,000, 3.69%, issued in July 2016, payable on July 12, 2031
100,000

 
—

Total remaining principal
800,000

 
850,000

Less: Debt issuance costs
(4,322
)
 
(3,646
)
Debt obligations
$
795,678

 
$
846,354


37

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

In June 2016, the Company paid the full maturing principal balance of $50.0 million on its 6.09% senior notes. As of September 30, 2016, future scheduled principal payments of debt obligations were as follows:
Last three months of 2016
$
50,000

2017
—

2018
—

2019
250,000

2020
—

Thereafter
500,000

Total
$
800,000

The Company was in compliance with all financial maintenance covenants associated with its senior notes and bank credit facility as of September 30, 2016 and December 31, 2015.
The fair value of the Company’s debt obligations, which are carried at amortized cost, is a Level III valuation that is estimated based on a discounted cash-flow calculation using estimated rates that would be offered to Oaktree for debt of similar terms and maturities. The fair value of these debt obligations, gross of debt issuance costs, was $819.6 million and $855.3 million as of September 30, 2016 and December 31, 2015, respectively, utilizing an average borrowing rate of 3.5% and 3.7%, respectively. As of September 30, 2016, a 10% increase in the assumed average borrowing rate would lower the estimated fair value to $802.5 million, whereas a 10% decrease would increase the estimated fair value to $837.5 million.
In July 2016, the Company’s indirect subsidiary, Oaktree Capital Management, L.P. (the “Issuer”), issued and sold to certain accredited investors $100 million of 3.69% senior notes (the “Notes”) due July 12, 2031. The Notes are senior unsecured obligations of the Issuer, jointly and severally guaranteed by the Company’s indirect subsidiaries, Oaktree Capital I, L.P., Oaktree Capital II, L.P. and Oaktree AIF Investments, L.P. (together with the Issuer, the “Obligors”) pursuant to a note and guaranty agreement (the “Note Agreement”). The Company used the proceeds from the sale of the Notes to simultaneously repay $100 million of its $250 million term loan due March 31, 2021.
The Note Agreement provides for certain affirmative and negative covenants, including financial covenants relating to the Obligors’ combined leverage ratio and minimum assets under management. In addition, the Note Agreement contains customary representations and warranties of the Obligors and customary events of default, in certain cases, subject to cure periods. The Issuer may prepay all, or from time to time any part of, the Notes at any time, subject to the Issuer’s payment of the applicable make-whole amount determined with respect to such principal amount prepaid. Upon the occurrence of a change of control, the Issuer will be required to make an offer to prepay the Notes together with the applicable make-whole amount determined with respect to such principal amount prepaid.
In March 2016, Oaktree Capital Management, L.P., Oaktree Capital II, L.P., Oaktree AIF Investments, L.P., and Oaktree Capital I, L.P. (collectively, the “Borrowers”) entered into the Second Amendment to Credit Agreement (the “Second Amendment”), which amended the credit agreement dated as of March 31, 2014 (as amended through and including the Second Amendment, the “Credit Agreement”). The Credit Agreement consists of a $250 million fully-funded term loan (the “Term Loan”), of which $100 million was repaid in July 2016, and a $500 million revolving credit facility (the “Revolver”). The Second Amendment extended the maturity date of the Credit Agreement from March 31, 2019 to March 31, 2021, at which time the entire remaining principal balance of $150 million is due, and provides the Borrowers with the option to extend the new maturity date by one year if the lenders holding at least 50% of the aggregate amount of the term loan and the revolving loan commitment thereunder on the date of the Borrowers’ extension request consent to such extension. Borrowings under the Credit Agreement generally bear interest at a spread to either LIBOR or an alternative base rate. Based on the current credit ratings of Oaktree Capital Management, L.P., the interest rate on borrowings is LIBOR plus 1.00% per annum and the commitment fee on the unused portions of the Revolver is 0.125% per annum. Utilizing an interest-rate swap, the Term Loan’s annual interest rate is fixed at 2.22% through January 2017, based on such current credit ratings. The Credit Agreement contains customary financial covenants and restrictions, including ones regarding a maximum leverage

38

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

ratio of 3.0-to-1.0 and a minimum required level of assets under management (as defined in the credit agreement). The Second Amendment increased the minimum level of assets under management to $60 billion and made certain other amendments to the provisions of the Credit Agreement. As of September 30, 2016, the Company had no outstanding borrowings under its $500 million revolving credit facility and was able to draw the full amount available without violating any financial maintenance covenants.
Credit Facilities of the Consolidated Funds
Certain consolidated funds may maintain revolving credit facilities to fund investments between, or in advance of, capital drawdowns. These facilities generally (a) are collateralized by the unfunded capital commitments of the consolidated funds’ limited partners, (b) are subject to an annual commitment fee based on unfunded commitments, and (c) contain various affirmative and negative covenants and reporting obligations, including restrictions on additional indebtedness, liens, margin stock, affiliate transactions, dividends and distributions, release of capital commitments, and portfolio asset dispositions. Additionally, certain consolidated funds may issue senior variable rate notes to fund investments on a longer term basis, generally up to ten years. The obligations of the consolidated funds are nonrecourse to the Company.
The Company adopted the new consolidation guidance as of January 1, 2016, resulting in the deconsolidation of substantially all of Oaktree’s investment funds as of that date. As of September 30, 2016, the consolidated funds had one credit facility with an outstanding balance of $174.7 million. Prior to adoption, as of December 31, 2015, the consolidated funds had credit facilities and senior variable rate notes with an aggregate outstanding balance of $6.5 billion. The fair value of the revolving credit facilities is a Level III valuation and approximated carrying value due to their short-term nature. The fair value of the credit facilities and senior variable rate notes is a Level III valuation and aggregated $3.7 billion as of December 31, 2015, using prices obtained from pricing vendors. As of September 30, 2016, the fair value of the credit facility approximated carrying value due to its recent issuance date. Financial instruments that are valued using quoted prices for the security or similar securities are generally classified as Level III because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions.
The consolidated funds had the following revolving credit facilities and term loans outstanding:
 
Outstanding Amount as of
 
Facility Capacity
 
LIBOR
Margin (1)
 
Maturity
 
Commitment Fee Rate
 
L/C Fee
Credit Agreement
September 30, 2016
 
December 31, 2015
Credit facilities
$
174,700

(2) 
$
2,381,324

 
$
450,000

 
1.25%
 
4/19/2019
 
N/A
 
N/A
Revolving credit facilities
—

 
2,718,394

 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
Senior variable rate notes
—

 
1,363,044

 
N/A
 
N/A
 
N/A
 
N/A
 
N/A
Total debt obligations
174,700

 
6,462,762

 
 
 
 
 
 
 
 
 
 
Less: Debt issuance costs
—

 
(20,020
)
 
 
 
 
 
 
 
 
 
 
Total debt obligations, net
$
174,700

 
$
6,442,742

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The facility bears interest at an annual rate of LIBOR plus the applicable margin.
(2)
The credit facility is collateralized by the portfolio investments and cash and cash-equivalents of the borrower.


39

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Debt Obligations of CLOs
Debt obligations of CLOs represent amounts due to holders of debt securities issued by the CLOs, including term loans of CLOs that had not priced as of period end. The table below sets forth the outstanding debt obligations of CLOs as of the date indicated.
 
As of September 30, 2016
 
As of December 31, 2015
 
Carrying Value (1)
 
Weighted Average Interest Rate
 
Weighted Average Remaining Maturity (years)
 
Carrying Value
 
Fair Value (2)
 
Weighted Average Interest Rate
 
Weighted Average Remaining Maturity (years)
Senior secured notes (3) 
$
465,387

 
2.82%
 
8.5
 
$
457,196

 
$
447,460

 
2.37%
 
9.3
Senior secured notes (3) 
464,430

 
2.86%
 
10.2
 
454,423

 
446,558

 
2.52%
 
11.0
Senior secured notes (4) 
54,868

 
3.16%
 
2.3
 
79,914

 
78,632

 
2.96%
 
3.0
Senior secured notes (5) 
381,266

 
2.26%
 
10.9
 
363,709

 
357,626

 
2.26%
 
11.7
Senior secured notes (3) 
463,936

 
2.78%
 
11.2
 
455,295

 
448,933

 
2.54%
 
12.0
Senior secured notes (5) 
382,650

 
2.29%
 
11.5
 
361,142

 
359,914

 
2.29%
 
12.3
Senior secured notes (5) 
415,552

 
2.28%
 
12.6
 
—

 
—

 
—
 
—
Subordinated note (6) 
11,823

 
N/A
 
10.2
 
25,500

 
16,400

 
N/A
 
11.0
Subordinated note (6) 
17,975

 
N/A
 
10.9
 
21,183

 
15,876

 
N/A
 
11.7
Subordinated note (6) 
18,827

 
N/A
 
11.2
 
25,500

 
18,337

 
N/A
 
12.0
Subordinated note (6) 
14,764

 
N/A
 
11.5
 
17,924

 
11,928

 
N/A
 
12.3
Subordinated note (6) 
20,441

 
N/A
 
12.6
 
12,036

 
12,036

 
N/A
 
1.6
Subordinated note (6) 
21,086

 
N/A
 
1.8
 
—

 
—

 
—
 
—
Term loan (5) 
107,247

 
1.20%
 
1.8
 
—

 
—

 
—
 
—
Term loan
—

 
—
 
—
 
81,238

 
81,238

 
1.20%
 
1.6
Total CLO debt obligations
2,840,252

 
 
 
 
 
2,355,060

 
$
2,294,938

 
 
 
 
Less: Debt issuance costs
—

 
 
 
 
 
(24,701
)
 
 
 
 
 
 
Total CLO debt obligations, net
$
2,840,252

 
 
 
 
 
$
2,330,359

 
 
 
 
 
 
 
 
 
 
 
(1)
The Company adopted the CLO measurement guidance on a modified retrospective approach as of January 1, 2016. Upon adoption, the Company elected the fair value option for the financial liabilities of the consolidated CLOs and determined that the fair value of the CLO assets was more observable than the fair value of the CLO liabilities. Accordingly, the fair value of CLO liabilities was measured as the fair value of CLO assets less the sum of (a) the fair value of any beneficial interests held by the Company and (b) the carrying value of any beneficial interests that represent compensation for services. Please see notes 2 and 5 for more information.
(2)
The debt obligations of the CLOs are Level III valuations and were valued using prices obtained from pricing vendors or recent transactions. Financial instruments that are valued using quoted prices for the subject or similar securities are generally classified as Level III because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities, or may require adjustment for investment-specific factors or restrictions. Financial instruments that are valued based on recent transactions are generally defined as securities purchased or sold within six months of the valuation date.  The fair value may also be based on a pending transaction expected to close after the valuation date. For certain recently issued debt obligations, the carrying value approximates fair value.
(3)
The weighted average interest rate is based on LIBOR plus a margin.
(4)
The interest rate was LIBOR plus a margin determined based on a formula as defined in the respective borrowing agreements, which incorporate different borrowing values based on the characteristics of collateral investments purchased.  The weighted average unused commitment fee rate ranged from 0% to 2.0%.
(5)
The weighted average interest rate is based on EURIBOR (subject to a zero floor) plus a margin.
(6)
The subordinated notes do not have a contractual interest rate; instead, they receive distributions from the excess cash flows generated by the CLO.

40

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The debt obligations of CLOs are nonrecourse to the Company and are backed by the investments held by the respective CLO. Assets of one CLO may not be used to satisfy the liabilities of another. As of September 30, 2016 and December 31, 2015, the fair value of CLO assets was $3.3 billion and $2.6 billion, respectively, and consisted of cash, corporate loans, corporate bonds and other securities.
As of September 30, 2016, future scheduled principal payments with respect to the debt obligations of CLOs were as follows:
Last three months of 2016
$
—

2017
—

2018
183,201

2019
—

2020
—

Thereafter
2,666,612

Total
$
2,849,813

10. NON-CONTROLLING REDEEMABLE INTERESTS IN CONSOLIDATED FUNDS
The following table sets forth a summary of changes in the non-controlling redeemable interests in the consolidated funds. Dividends reinvested and in-kind contributions or distributions are non-cash in nature and have been presented on a gross basis in the table below.
 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
Beginning balance
$
38,173,125

 
$
41,681,155

Cumulative-effect adjustment from adoption of accounting guidance
(37,969,042
)
 
—

Initial consolidation of a fund
34,095

 
—

Contributions
116,896

 
4,654,438

Distributions
(51,694
)
 
(4,595,694
)
Net income
14,248

 
(1,037,265
)
Change in distributions payable
481

 
566,609

Change in accrued or deferred contributions
—

 
13,467

Foreign currency translation and other
1,609

 
(341,899
)
Ending balance
$
319,718

 
$
40,940,811

 
11. UNITHOLDERS’ CAPITAL
Unitholders’ capital reflects the economic interests attributable to Class A unitholders, non-controlling interests in consolidated subsidiaries and non-controlling interests in consolidated funds. Non-controlling interests in consolidated subsidiaries represent the portion of unitholders’ capital attributable to the OCGH non-controlling interest and third parties. The OCGH non-controlling interest is determined at the Oaktree Operating Group level based on the proportionate share of Oaktree Operating Group units held by the OCGH unitholders. Certain expenses, such as income tax and related administrative expenses of Oaktree Capital Group, LLC and its Intermediate Holding Companies, are solely attributable to the Class A unitholders. As of September 30, 2016 and December 31, 2015, respectively, OCGH units represented 92,038,771 of the total 154,952,767 Oaktree Operating Group units and 91,937,873 of the total 153,907,733 Oaktree Operating Group units. Based on total allocable Oaktree Operating Group capital of $1,679,087 and $1,575,504 as of September 30, 2016 and December 31, 2015, respectively, the OCGH non-controlling interest was $997,344 and $941,141. As of September 30, 2016 and December 31, 2015, non-controlling interests attributable to related parties and third parties was $10,592 and $102,789, respectively.


41

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The following table sets forth a summary of net income attributable to the OCGH unitholders' non-controlling interest and to Class A unitholders:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Weighted average Oaktree Operating Group units outstanding (in thousands):
 
 
 
 
 
 
 
OCGH non-controlling interest
92,190

 
105,505

 
92,181

 
106,372

Class A unitholders
62,755

 
48,440

 
62,424

 
47,304

Total weighted average units outstanding
154,945

 
153,945

 
154,605

 
153,676

Oaktree Operating Group net income:
 
 
 

 
 
 
 

Net income attributable to OCGH non-controlling interest
$
96,053

 
$
5,868

 
$
238,135

 
$
168,874

Net income attributable to Class A unitholders
65,384

 
2,694

 
161,396

 
72,882

Oaktree Operating Group net income (1) 
$
161,437

 
$
8,562

 
$
399,531

 
$
241,756

Net income attributable to Oaktree Capital Group, LLC:
 
 
 

 
 
 
 

Oaktree Operating Group net income attributable to Class A unitholders
$
65,384

 
$
2,694

 
$
161,396

 
$
72,882

Non-Operating Group expenses
(182
)
 
(464
)
 
(647
)
 
(1,424
)
Income tax expense of Intermediate Holding Companies
(6,905
)
 
(343
)
 
(25,327
)
 
(11,504
)
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

 
 
 
 
 
(1)
Oaktree Operating Group net income does not include amounts attributable to other non-controlling interests, which amounted to $1,230 and $4,899 for the three months ended September 30, 2016 and 2015, respectively, and $3,650 and $5,503 for the nine months ended September 30, 2016 and 2015, respectively.
The change in the Company’s ownership interest in the Oaktree Operating Group is set forth below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

Equity reallocation between controlling and non-controlling interests
3,766

 
2,496

 
11,892

 
47,698

Change from net income attributable to Oaktree Capital Group, LLC and transfers from non-controlling interests
$
62,063

 
$
4,383

 
$
147,314

 
$
107,652

 
Please see notes 12, 13 and 14 for additional information regarding transactions that impacted unitholders’ capital.

42

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

12. EARNINGS PER UNIT
The computation of net income per Class A unit is set forth below:  
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income per Class A unit (basic and diluted):
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

Weighted average number of Class A units outstanding (basic and diluted)
62,755

 
48,440

 
62,424

 
47,304

Basic and diluted net income per Class A unit
$
0.93

 
$
0.04

 
$
2.17

 
$
1.27

OCGH units may be exchanged on a one-for-one basis into Class A units, subject to certain restrictions. As of September 30, 2016, there were 92,038,771 OCGH units outstanding, which are vested or will vest through March 1, 2026, that ultimately may be exchanged into 92,038,771 Class A units. The exchange of these units would proportionally increase the Company’s interest in the Oaktree Operating Group. However, as the restrictions set forth in the exchange agreement were in place at the end of each respective reporting period, those units were not included in the computation of diluted earnings per unit for the three and nine months ended September 30, 2016 and 2015.
In connection with the 2014 Highstar acquisition, the Company has a contingent consideration liability that is payable in a combination of cash and fully-vested OCGH units. The amount of contingent consideration, if any, is based on the achievement of certain performance targets over a period of up to seven years from the acquisition date. As of September 30, 2016, no OCGH units were considered issuable under the terms of the contingent consideration arrangement; consequently, no contingently issuable units were included in the computation of diluted earnings per unit for the three and nine months ended September 30, 2016 and 2015. Please see note 15 for more information.
13. EQUITY-BASED COMPENSATION
Class A and OCGH Unit Awards
During the nine months ended September 30, 2016, the Company granted 830,543 Class A units and 629,667 restricted OCGH units to its employees and directors, subject to annual vesting over a weighted average period of approximately 4.2 years. The grant date fair value of OCGH units awarded during the nine months ended September 30, 2016 was determined by applying a 20% discount to the Class A unit trading price on the New York Stock Exchange as of the grant date. The calculation of compensation expense for all OCGH units awarded in 2016 assumed a forfeiture rate, based on expected employee turnover, of up to 3.0% annually.
As of September 30, 2016, the Company expected to recognize compensation expense on its unvested Class A and OCGH unit awards of $152.4 million over a weighted average period of 4.0 years.  
A summary of the status of the Company’s unvested Class A and OCGH unit awards and a summary of changes for the period presented are set forth below (actual dollars per unit):
 
Class A Units
 
OCGH Units
 
Number of Units
 
Weighted Average Grant Date Fair Value
 
Number of Units
 
Weighted Average Grant Date Fair Value
 
 
 
 
 
 
 
 
Balance, December 31, 2015
2,376,340

 
$
38.18

 
2,265,967

 
$
40.70

Granted
830,543

 
46.79

 
629,667

 
37.56

Vested
(969,556
)
 
37.52

 
(317,165
)
 
39.11

Forfeited
(51,041
)
 
38.96

 
(110,932
)
 
39.93

Balance, September 30, 2016
2,186,286

 
$
41.73

 
2,467,537

 
$
40.14


43

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

Equity Value Units
OCGH equity value units (“EVUs”) represent special limited partnership units in OCGH that entitle the holder the right to receive a one-time special distribution that will be settled in OCGH units, based on value created during a specified period (“Term”) in excess of a fixed “Base Value.” The value created will be measured on a per unit basis, based on Class A unit trading prices and certain components of quarterly distributions with respect to interim periods during the Term. EVUs also give the holder the right, subject to service vesting and Oaktree performance relative to the accreting Base Value, to receive certain quarterly distributions from OCGH. EVUs do not entitle the holder to any voting rights.
Certain EVUs provide the holder with liquidity rights in respect of the one-time special distribution that will be settled in OCGH units. The Company accounts for EVUs with liquidity rights as liability-classified awards. As of September 30, 2016, there were 1,000,000 equity-classified EVUs and 1,000,000 liability-classified EVUs outstanding. As of September 30, 2016, the Company expected to recognize $6.5 million of compensation expense on its unvested EVUs over the next 3.3 years. Equity-classified EVUs that require future service are expensed on a straight-line basis over the requisite service period. Liability-classified EVUs are remeasured at the end of each quarter.
The fair value of EVUs was determined using a Monte Carlo simulation model at the grant date for equity-classified EVUs and as of the period end date for liability-classified EVUs. The fair value is affected by the Class A unit trading price and assumptions regarding certain complex and subjective variables, including the expected Class A unit trading price volatility, distributions and exercise timing, and the risk-free interest rate. The fair value of equity-classified EVUs reflected a 20% lack of marketability discount for the OCGH units that will be issued upon vesting, and an assumed forfeiture rate of zero.
14. INCOME TAXES AND RELATED PAYMENTS
Oaktree is a publicly traded partnership and Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., two of its Intermediate Holding Companies, are wholly-owned corporate subsidiaries. Income earned by these corporate subsidiaries is subject to U.S. federal and state income taxation and taxed at prevailing rates. Income earned by non-corporate subsidiaries is not subject to U.S. federal corporate income tax and is allocated to the Oaktree Operating Group’s unitholders.  The Company’s effective tax rate is dependent on many factors, including the estimated nature of many amounts and the mix of revenues and expenses between the subsidiaries that are or are not subject to income tax; consequently, from period to period the effective tax rate is subject to significant variation. The Company’s effective tax rate used for interim periods is based on the estimated full-year income tax rate. Certain future items that cannot be reliably estimated, such as incentive income, are excluded from the estimated annual effective tax rate. The tax expense or benefit stemming from these items is recognized in the same period as the underlying income or expense.
Tax authorities currently are examining certain income tax returns of Oaktree, with certain of these examinations at an advanced stage. During the four quarters ending September 30, 2017, the Company believes

44

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

that it is reasonably possible that one outcome of these current examinations and expiring statutes of limitation on other items may be the release of up to approximately $3.9 million of previously accrued Operating Group income taxes. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax examinations and that any settlements related thereto will not have a material adverse effect on the Company’s consolidated financial statements; however, there can be no assurances as to the ultimate outcomes.
Tax Receivable Agreement
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. have entered into a tax receivable agreement with OCGH unitholders that, as amended, provides for the payment to an exchanging or selling OCGH unitholder of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes that they actually realize (or are deemed to realize in the case of an early termination payment by Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc., or a change of control) as a result of an increase in the tax basis of the assets owned by the Oaktree Operating Group. When an exchange of OCGH units results in an increase to the tax basis of the assets owned by the Oaktree Operating Group, a deferred tax asset and an associated liability for payments to OCGH unitholders under the tax receivable agreement are recorded, subject to realizability considerations. The establishment of a deferred tax asset increases additional paid-in capital because the transactions are between Oaktree and its unitholders.
No amounts were paid under the tax receivable agreement during the nine months ended September 30, 2016.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Oaktree enters into contracts that contain certain representations, warranties and indemnifications. The Company’s exposure under these arrangements would involve future claims that have not yet been asserted. Inasmuch as no such claims currently exist or are expected to arise, the Company has not accrued any liability in connection with these indemnifications.
Legal Actions
Oaktree, its affiliates, investment professionals, and portfolio companies are routinely involved in litigation and other legal actions in the ordinary course of their business and investing activities.  In addition, Oaktree is subject to the authority of a number of U.S. and non-U.S. regulators, including the SEC and the Financial Industry Regulatory Authority, and those authorities periodically conduct examinations of Oaktree and make other inquiries that may result in the commencement of regulatory proceedings against Oaktree and its personnel. Oaktree is currently not subject to any pending actions or regulatory proceedings that either individually or in the aggregate are expected to have a material impact on its consolidated financial statements.
Incentive Income
In addition to the incentive income recognized by the Company, certain of its funds have amounts recorded as potentially allocable to the Company as its share of potential future incentive income, based on each fund’s net asset value. Inasmuch as this incentive income is contingent upon future investment activity and other factors, it is not recognized by the Company until it is fixed or determinable. As of September 30, 2016 and December 31, 2015, the aggregate of such amounts recorded at the fund level in excess of incentive income recognized by the Company was $1,843,940 and $1,540,469, respectively, for which related direct incentive income compensation expense was estimated to be $973,356 and $750,077, respectively.
Contingent Consideration
The Company has a contingent consideration obligation of up to $60.0 million related to the 2014 Highstar acquisition, payable in cash and fully-vested OCGH units. The amount of contingent consideration is based on the achievement of certain performance targets over a period of up to seven years from the acquisition date. As of September 30, 2016 and December 31, 2015, respectively, the fair value of the contingent consideration liability was $23.7 million and $28.5 million. Changes in this liability resulted in income of $1.3 million and $4.8 million for the three and nine months ended September 30, 2016, respectively, and expenses of $0.4 million and $1.9 million for the three and nine months ended September 30, 2015, respectively. The fair value of the contingent

45

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

consideration liability is a Level III valuation, which uses a discounted cash-flow analysis based on a probability-weighted average estimate of certain performance targets, including fundraising and revenue levels. The assumptions used in the analysis are inherently subjective, and thus the ultimate amount of the contingent consideration liability may differ materially from the current estimate. The contingent consideration liability is included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition. Changes in the liability are recorded in general and administrative expense in the condensed consolidated statements of operations.
Commitments to Funds
As of September 30, 2016 and December 31, 2015, the Company, generally in its capacity as general partner, had undrawn capital commitments of $532.8 million and $469.4 million, respectively, including commitments to both unconsolidated and consolidated funds.
Investment Commitments of Consolidated Funds
Certain of the consolidated funds are parties to credit arrangements that provide for the issuance of letters of credit and/or revolving loans, which may require the particular fund to extend loans to investee companies. The consolidated funds use the same investment criteria in making these commitments as they do for investments that are included in the condensed consolidated statements of financial condition. The unfunded liability associated with these credit arrangements is equal to the amount by which the contractual loan commitment exceeds the sum of funded debt and cash held in escrow, if any. As of September 30, 2016 and December 31, 2015, the consolidated funds had potential aggregate commitments of $2.6 million and $1.3 billion, respectively. These commitments would be funded by the funds’ cash balances, proceeds from asset sales or drawdowns against existing capital commitments.
A consolidated fund may agree to guarantee the repayment obligations of certain investee companies. As of September 30, 2016 and December 31, 2015, the aggregate amounts guaranteed were zero and $142.4 million, respectively.
Certain consolidated funds are investment companies that are required to disclose financial support provided or contractually required to be provided to any of their portfolio companies. During the nine months ended September 30, 2016, the consolidated funds did not provide any financial support to portfolio companies.

46

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

16. RELATED-PARTY TRANSACTIONS
The Company considers its senior executives, employees and unconsolidated Oaktree funds to be affiliates (as defined in the FASB ASC Master Glossary). Amounts due from and to affiliates are set forth below. The fair value of amounts due from and to affiliates is a Level III valuation and was valued based on a discounted cash-flow analysis. The carrying value of amounts due from affiliates approximated fair value due to their short-term nature or because their average interest rate, which ranged from 2.0% to 3.0%, approximated the Company’s cost of debt. The fair value of amounts due to affiliates approximated $176,231 and $160,952 as of September 30, 2016 and December 31, 2015, respectively, based on a discount rate of 10.0%.
 
As of
 
September 30,
2016
 
December 31,
2015
Due from affiliates:
 
 
 
Loans
$
23,035

 
$
29,718

Amounts due from unconsolidated funds
61,545

 
777

Management fees and incentive income due from unconsolidated funds
65,395

 
—

Payments made on behalf of unconsolidated entities
3,807

 
3,788

Non-interest bearing advances made to certain non-controlling interest holders and employees
1,111

 
1,616

Total due from affiliates
$
154,893

 
$
35,899

Due to affiliates:
 
 
 

Due to OCGH unitholders in connection with the tax receivable agreement (please see note 14)
$
356,851

 
$
356,851

Amounts due to senior executives, certain non-controlling interest holders and employees
3,342

 
—

Total due to affiliates
$
360,193

 
$
356,851

Loans
Loans primarily consist of interest-bearing advances made to certain non-controlling interest holders, primarily employees, to meet tax obligations related to vesting of equity awards. The notes, which are generally recourse to the borrower or secured by vested equity and other collateral, typically bear interest at the Company’s cost of debt and generated interest income of $208 and $658 for the three and nine months ended September 30, 2016, and $949 and $1,862 for the three and nine months ended September 30, 2015, respectively.
Due From Oaktree Funds and Portfolio Companies
In the normal course of business, the Company advances certain expenses on behalf of Oaktree funds. Amounts advanced on behalf of consolidated funds are eliminated in consolidation. Certain expenses paid by the Company, which typically are employee travel and other costs associated with particular portfolio company holdings, are reimbursed to the Company by the portfolio companies.
In January 2016, the Company extended a short-term loan to one of the investment funds that it manages. The loan and accrued interest were fully repaid as of September 30, 2016.
Revenues Earned From Oaktree Funds
Management fees and incentive income earned from unconsolidated Oaktree funds totaled $261.3 million and $743.7 million for the three and nine months ended September 30, 2016, respectively, and $19.1 million and $57.0 million for the three and nine months ended September 30 2015, respectively.
Other Investment Transactions
The Company’s senior executives, directors and senior professionals are permitted to invest their own capital (or the capital of family trusts or other estate planning vehicles they control) in Oaktree funds, for which they

47

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

pay the particular fund’s full management fee but not its incentive allocation. To facilitate the funding of capital calls by funds in which employees are invested, the Company periodically advances on a short-term basis the capital calls on certain employees’ behalf. These advances are reimbursed generally toward the end of the calendar quarter in which the capital calls occurred. Amounts advanced by the Company are included in non-interest bearing advances made to certain non-controlling interest holders and employees.
Aircraft Services
In March 2015, the Company exercised a purchase option on an airplane lease for $12.5 million. Howard Marks, the Company’s co-chairman, may use this aircraft for personal travel, in which case he reimburses the Company, pursuant to Company policy.  Additionally, the Company occasionally makes use of an airplane owned by one of its senior executives for business purposes at a price to the Company that is based on market rates. In September 2016, the Company entered into a purchase contract and made a deposit for a new airplane to be delivered in 2017, at which time it plans to sell its existing airplane.
Special Allocations
Certain senior executives receive special allocations based on a percentage of profits of the Oaktree Operating Group. These special allocations, which are recorded as compensation expense, are made on a current basis for so long as they remain senior executives of the Company, with limited exceptions.
17. SEGMENT REPORTING
The Company’s business is comprised of one segment, the investment management segment. As a global investment manager, the Company provides investment management services through funds and separate accounts. Management makes operating decisions and assesses business performance based on financial and operating metrics and data that are presented without the consolidation of any funds.
The Company conducts its investment management business primarily in the United States, where substantially all of its revenues are generated.
Adjusted Net Income
The Company’s chief operating decision maker uses adjusted net income (“ANI”) as a tool to help evaluate the financial performance of, and make resource allocations and other operating decisions for, the investment management segment. The components of revenues and expenses used in the determination of ANI do not give effect to the consolidation of the funds that the Company manages. Segment revenues include investment income (loss) that is classified in other income (loss) in the GAAP-basis statements of operations. Segment revenues and expenses also reflect Oaktree’s proportionate economic interest in Highstar, whereby amounts received for contractually reimbursable costs are classified for segment reporting as expenses and under GAAP as other income. In addition, ANI excludes the effect of (a) non-cash equity-based compensation expense related to unit grants made before our initial public offering, (b) acquisition-related items, including amortization of intangibles and changes in the contingent consideration liability, (c) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (d) income taxes, (e) other income or expenses applicable to OCG or its Intermediate Holding Companies, and (f) the adjustment for non-controlling interests. Beginning with the fourth quarter of 2015, the definition of ANI was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for ANI are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, but for ANI unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Incentive income and incentive income compensation expense are included in ANI when the underlying fund distributions are known or knowable as of the

48

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

respective quarter end, which may be later than the time at which the same revenue or expense is included in the GAAP-basis statements of operations, for which the revenue standard is fixed or determinable and the expense standard is probable and reasonably estimable. CLO investments are carried at fair value for GAAP reporting, whereas for segment reporting they are carried at amortized cost, subject to any impairment charges. Investment income on CLO investments is recognized in ANI when cash distributions are received. Cash distributions are allocated between income and return of capital based on the effective yield method. ANI is calculated at the Operating Group level.
ANI (1) was as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 

 
 

 
 

 
 

Management fees
$
194,349

 
$
185,766

 
$
593,069

 
$
566,058

Incentive income
99,731

 
16,925

 
283,966

 
230,952

Investment income (loss)
70,928

 
(19,950
)
 
133,730

 
56,873

Total revenues
365,008

 
182,741

 
1,010,765

 
853,883

Expenses:
 
 
 

 
 
 
 
Compensation and benefits
(94,624
)
 
(97,348
)
 
(298,067
)
 
(310,996
)
Equity-based compensation
(16,041
)
 
(8,836
)
 
(39,189
)
 
(27,760
)
Incentive income compensation
(47,378
)
 
(7,596
)
 
(132,534
)
 
(127,252
)
General and administrative
(29,258
)
 
(30,279
)
 
(91,339
)
 
(90,181
)
Depreciation and amortization
(2,866
)
 
(3,031
)
 
(9,074
)
 
(7,027
)
Total expenses
(190,167
)
 
(147,090
)
 
(570,203
)
 
(563,216
)
Adjusted net income before interest and other income (expense)
174,841

 
35,651

 
440,562

 
290,667

Interest expense, net of interest income(2)
(7,799
)
 
(8,388
)
 
(24,458
)
 
(26,103
)
Other income (expense), net
(4,902
)
 
(283
)
 
(6,294
)
 
(2,279
)
Adjusted net income
$
162,140

 
$
26,980

 
$
409,810

 
$
262,285

 
 
 
 
 
(1)
In the fourth quarter of 2015, the definition of ANI was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for ANI are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, whereas for ANI unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Additionally, for ANI, foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Placement costs associated with closed-end funds amounted to $0.7 million and $4.4 million for the three and nine months ended September 30, 2015, respectively, and remain expensed as incurred in those periods for both GAAP and ANI purposes.
(2)
Interest income was $1.7 million for both the three months ended September 30, 2016 and 2015, and $4.6 million and $3.9 million for the nine months ended September 30, 2016 and 2015, respectively.

49

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

A reconciliation of net income attributable to Oaktree Capital Group, LLC to adjusted net income of the investment management segment is presented below.  
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

Incentive income (1) 
(7
)
 
8,676

 
39,881

 
20,249

Incentive income compensation (1) 
7

 
(2,689
)
 
(39,881
)
 
(20,242
)
Investment income (2) 
(6,155
)
 
—

 
(19,733
)
 
—

Equity-based compensation (3) 
3,798

 
3,658

 
9,271

 
12,523

Placement costs (4) 
893

 
—

 
8,807

 
—

Foreign-currency hedging (5) 
1,306

 
6,338

 
10,837

 
959

Acquisition-related items (6) 
(253
)
 
1,433

 
(1,751
)
 
4,935

Income taxes (7) 
8,567

 
1,893

 
29,818

 
15,253

Non-Operating Group expenses (8) 
182

 
464

 
647

 
1,424

Non-controlling interests (8) 
95,505

 
5,320

 
236,492

 
167,230

Adjusted net income
$
162,140

 
$
26,980

 
$
409,810

 
$
262,285

 
 
 
 
 
(1)
This adjustment adds back the effect of timing differences associated with the recognition of incentive income and incentive income compensation expense between adjusted net income and net income attributable to OCG.
(2)
This adjustment adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting are accounted for at amortized cost, subject to impairment between adjusted net income and net income attributable to OCG.
(3)
This adjustment adds back the effect of (a) equity-based compensation expense related to unit grants made before the Company’s initial public offering, which is excluded from adjusted net income because it is a non-cash charge that does not affect the Company’s financial position, and (b) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting.
(4)
This adjustment adds back the effect of timing differences with respect to the recognition of third-party placement costs associated with closed-end funds between adjusted net income and net income attributable to OCG.
(5)
This adjustment adds back the effect of timing differences associated with the recognition of unrealized gains and losses related to foreign-currency hedging between adjusted net income and net income attributable to OCG.
(6)
This adjustment adds back the effect of acquisition-related items associated with the amortization of intangibles and changes in the contingent consideration liability.
(7)
Because adjusted net income is a pre-tax measure, this adjustment adds back the effect of income tax expense.
(8)
Because adjusted net income is calculated at the Operating Group level, this adjustment adds back the effect of items applicable to OCG, its Intermediate Holding Companies or non-controlling interests.

50

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

The following tables reconcile the Company’s segment information to the condensed consolidated financial statements:
 
As of or for the Three Months Ended September 30, 2016
 
Segment
 
Adjustments
 
Consolidated
 
 
 
 
 
 
Management fees (1)
$
194,349

 
$
(3,375
)
 
$
190,974

Incentive income (1)
99,731

 
(475
)
 
99,256

Investment income (1)
70,928

 
(5,170
)
 
65,758

Total expenses (2)
(190,167
)
 
(12,172
)
 
(202,339
)
Interest expense, net (3)
(7,799
)
 
(24,615
)
 
(32,414
)
Other income (expense), net (4)  
(4,902
)
 
5,445

 
543

Other income of consolidated funds (5)
—

 
55,612

 
55,612

Income taxes
—

 
(8,567
)
 
(8,567
)
Net income attributable to non-controlling interests in consolidated funds
—

 
(13,243
)
 
(13,243
)
Net income attributable to non-controlling interests in consolidated subsidiaries
—

 
(97,283
)
 
(97,283
)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC
$
162,140

 
$
(103,843
)
 
$
58,297

Corporate investments (6)
$
1,383,612

 
$
(342,618
)
 
$
1,040,994

Total assets (7)
$
3,302,911

 
$
3,796,465

 
$
7,099,376

 
 
 
 
 
(1)
The adjustment represents (a) the elimination of amounts earned from the consolidated funds, (b) for management fees, the reclassification of $397 of net gains related to foreign-currency hedging activities to general and administrative expense, and (c) for investment income, differences of $6,155 related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting accounted for at amortized cost, subject to impairment.
(2)
The expense adjustment consists of (a) equity-based compensation expense of $4,203 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $1,143, (c) expenses incurred by the Intermediate Holding Companies of $229, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $7, (e) acquisition-related items of $253, (f) adjustments of $4,941 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $404 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $893 related to third-party placement costs, and (i) $1,413 of net losses related to foreign-currency hedging activities.
(3)
The interest expense adjustment represents the inclusion of interest expense attributable to third-party investors in CLOs, non-controlling interests of the consolidated funds and the exclusion of segment interest income.
(4)
The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $4,941 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $504 in net losses related to foreign-currency hedging activities to general and administrative expense.
(5)
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income attributable to third-party investors in CLOs and non-controlling interests of the consolidated funds.
(6)
The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.4 billion of corporate investments included $1.1 billion of equity-method investments.
(7)
The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.

51

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
As of or for the Three Months Ended September 30, 2015
 
Segment
 
Adjustments
 
Consolidated
 
 
 
 
 
 
Management fees (1) 
$
185,766

 
$
(138,660
)
 
$
47,106

Incentive income (1)
16,925

 
(13,540
)
 
3,385

Investment income (loss) (1)
(19,950
)
 
30,292

 
10,342

Total expenses (2)
(147,090
)
 
(43,428
)
 
(190,518
)
Interest expense, net (3)
(8,388
)
 
(47,635
)
 
(56,023
)
Other income (expense), net (4) 
(283
)
 
6,651

 
6,368

Other income (loss) of consolidated funds (5) 
—

 
(1,585,338
)
 
(1,585,338
)
Income taxes
—

 
(1,893
)
 
(1,893
)
Net loss attributable to non-controlling interests in consolidated funds
—

 
1,779,225

 
1,779,225

Net income attributable to non-controlling interests in consolidated subsidiaries
—

 
(10,767
)
 
(10,767
)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC
$
26,980

 
$
(25,093
)
 
$
1,887

Corporate investments (6) 
$
1,465,195

 
$
(1,291,621
)
 
$
173,574

Total assets (7) 
$
3,229,121

 
$
51,585,676

 
$
54,814,797

 
 
 
 
 
(1)
The adjustment represents (a) the elimination of amounts earned from the consolidated funds and (b) for management fees, the reclassification of $3,869 of net gains related to foreign-currency hedging activities to general and administrative expense.
(2)
The expense adjustment consists of (a) equity-based compensation expense of $3,874 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $31,400, (c) expenses incurred by the Intermediate Holding Companies of $491, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $2,689, (e) acquisition-related items of $1,433, (f) adjustments of $6,368 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $217 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $2,752 of net losses related to foreign-currency hedging activities, and (i) other expenses of $16.
(3)
The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling interests of the consolidated funds and the exclusion of segment interest income.
(4)
The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $6,368 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $283 of net losses related to foreign-currency hedging activities to general and administrative expense.
(5)
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income (loss) attributable to non-controlling interests of the consolidated funds.
(6)
The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.5 billion of corporate investments included $1.3 billion of equity-method investments.
(7)
The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.


52

Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
As of or for the Nine Months Ended September 30, 2016
 
Segment
 
Adjustments
 
Consolidated
 
 
 
 
 
 
Management fees (1)
$
593,069

 
$
(8,527
)
 
$
584,542

Incentive income (1)
283,966

 
(41,072
)
 
242,894

Investment income (1)
133,730

 
2,475

 
136,205

Total expenses (2)
(570,203
)
 
(8,968
)
 
(579,171
)
Interest expense, net (3)
(24,458
)
 
(62,391
)
 
(86,849
)
Other income (expense), net (4)  
(6,294
)
 
18,186

 
11,892

Other income of consolidated funds (5)
—

 
113,130

 
113,130

Income taxes
—

 
(29,818
)
 
(29,818
)
Net income attributable to non-controlling interests in consolidated funds
—

 
(15,618
)
 
(15,618
)
Net income attributable to non-controlling interests in consolidated subsidiaries
—

 
(241,785
)
 
(241,785
)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC
$
409,810

 
$
(274,388
)
 
$
135,422

Corporate investments (6)
$
1,383,612

 
$
(342,618
)
 
$
1,040,994

Total assets (7)
$
3,302,911

 
$
3,796,465

 
$
7,099,376

 
 
 
 
 
(1)
The adjustment represents (a) the elimination of amounts earned from the consolidated funds, (b) for management fees, the reclassification of $1,086 of net gains related to foreign-currency hedging activities to general and administrative expense, and (c) for investment income, differences of $19,733 related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting accounted for at amortized cost, subject to impairment.
(2)
The expense adjustment consists of (a) equity-based compensation expense of $10,269 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $3,819, (c) expenses incurred by the Intermediate Holding Companies of $765, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $39,881, (e) acquisition-related items of $1,751, (f) adjustments of $16,287 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $997 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $8,807 related to third-party placement costs, and (i) $11,650 of net losses related to foreign-currency hedging activities.
(3)
The interest expense adjustment represents the inclusion of interest expense attributable to third-party investors in CLOs, non-controlling interests of the consolidated funds and the exclusion of segment interest income.
(4)
The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $16,287 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $1,899 in net losses related to foreign-currency hedging activities to general and administrative expense.
(5)
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income attributable to third-party investors in CLOs and non-controlling interests of the consolidated funds.
(6)
The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.4 billion of corporate investments included $1.1 billion of equity-method investments.
(7)
The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.

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Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

 
As of or for the Nine Months Ended September 30, 2015
 
Segment
 
Adjustments
 
Consolidated
 
 
 
 
 
 
Management fees (1) 
$
566,058

 
$
(417,210
)
 
$
148,848

Incentive income (1)
230,952

 
(227,003
)
 
3,949

Investment income (1)
56,873

 
(18,155
)
 
38,718

Total expenses (2)
(563,216
)
 
(109,205
)
 
(672,421
)
Interest expense, net (3)
(26,103
)
 
(129,231
)
 
(155,334
)
Other income (expense), net (4) 
(2,279
)
 
16,204

 
13,925

Other income (loss) of consolidated funds (5) 
—

 
(162,622
)
 
(162,622
)
Income taxes
—

 
(15,253
)
 
(15,253
)
Net loss attributable to non-controlling interests in consolidated funds
—

 
1,034,521

 
1,034,521

Net income attributable to non-controlling interests in consolidated subsidiaries
—

 
(174,377
)
 
(174,377
)
Adjusted net income/net income attributable to Oaktree Capital Group, LLC
$
262,285

 
$
(202,331
)
 
$
59,954

Corporate investments (6) 
$
1,465,195

 
$
(1,291,621
)
 
$
173,574

Total assets (7) 
$
3,229,121

 
$
51,585,676

 
$
54,814,797

 
 
 
 
 
(1)
The adjustment represents (a) the elimination of amounts earned from the consolidated funds and (b) for management fees, the reclassification of $10,553 of net gains related to foreign-currency hedging activities to general and administrative expense.
(2)
The expense adjustment consists of (a) equity-based compensation expense of $12,479 related to unit grants made before the Company’s initial public offering, (b) consolidated fund expenses of $103,831, (c) expenses incurred by the Intermediate Holding Companies of $1,477, (d) the effect of timing differences in the recognition of incentive income compensation expense between adjusted net income and net income attributable to OCG of $20,242, (e) acquisition-related items of $4,935, (f) adjustments of $17,471 related to amounts received for contractually reimbursable costs that are classified as expenses for segment reporting and as other income under GAAP, (g) differences of $44 arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (h) $10,861 of net gains related to foreign-currency hedging activities, and (i) other expenses of $71.
(3)
The interest expense adjustment represents the inclusion of interest expense attributable to non-controlling interests of the consolidated funds and the exclusion of segment interest income.
(4)
The adjustment to other income (expense), net represents adjustments related to (a) amounts received for contractually reimbursable costs of $17,471 that are classified as expenses for segment reporting and as other income under GAAP, and (b) the reclassification of $1,267 of net gains related to foreign-currency hedging activities to general and administrative expense.
(5)
The adjustment to other income of consolidated funds primarily represents the inclusion of interest, dividend and other investment income attributable to non-controlling interests of the consolidated funds.
(6)
The adjustment to corporate investments is to remove from segment assets the Company’s investments in the consolidated funds, including investments that are treated as equity- or cost-method investments for segment reporting. The $1.5 billion of corporate investments included $1.3 billion of equity-method investments.
(7)
The total assets adjustment represents the inclusion of investments and other assets of the consolidated funds, net of segment assets eliminated in consolidation, which are primarily corporate investments in funds and incentive income receivable.


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Oaktree Capital Group, LLC
Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2016
($ in thousands, except where noted)

18. SUBSEQUENT EVENTS
On October 28, 2016, the Company declared a distribution of $0.65 per Class A unit. This distribution, which is related to the third quarter of 2016, will be paid on November 14, 2016 to Class A unitholders of record at the close of business on November 7, 2016.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Oaktree Capital Group, LLC and the related notes included within this quarterly report. This discussion contains forward-looking statements that are subject to risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. The factors listed under “Risk Factors” and “Forward-Looking Statements” in this quarterly report and under “Risk Factors” in our annual report provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in any forward-looking statements.
Business Overview
Oaktree is a leader among global investment managers specializing in alternative investments, with $100 billion in AUM as of September 30, 2016. Our mission is to deliver superior investment results with risk under control and to conduct our business with the highest integrity. We emphasize an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Over three decades, we have developed a large and growing client base through our ability to identify and capitalize on opportunities for attractive investment returns in less efficient markets.
We manage assets on behalf of many of the most significant institutional investors in the world. Our clientele includes 74 of the 100 largest U.S. pension plans, 39 states in the United States, over 400 corporations and/or their pension funds, over 350 university, charitable and other endowments and foundations, 16 sovereign wealth funds and over 300 other non-U.S. institutional investors. As measured by AUM, over 40% of our clients are invested in two or three different investment strategies, and over 35% are invested in four or more. Headquartered in Los Angeles, we serve these clients with over 900 employees and offices in 18 cities worldwide.
Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients. Our segment revenue flows from the management fees and incentive income generated by the funds that we manage, as well as the investment income earned from the investments we make in our funds, third-party funds and other companies. The management fees that we receive are based on the contractual terms of the relevant fund and are typically calculated as a fixed percentage of the capital commitments (as adjusted for distributions during a fund’s liquidation period), drawn capital, cost basis or NAV of the particular fund. Incentive income represents our share (typically 20%) of the investors’ profits in most of the closed-end and evergreen funds. Investment income reflects the investment return on a mark-to-market basis and our equity participation on the amounts that we invest in Oaktree and third-party funds, as well as in CLOs and other companies.
Business Environment and Developments
As a global investment manager, we are affected by myriad factors, including the condition of the global economy and financial markets; the relative attractiveness of our investment strategies and investors’ demand for them; and regulatory or other governmental policies or actions. Global economic conditions can significantly affect the values of our funds’ investments and our ability to make new investments or sell existing investments for our funds. Historically, however, the diversified nature of both our array of investment strategies and our revenue mix has generally allowed us to benefit from both strong and weak economic environments. Weak economies and the declining financial markets that typically accompany them tend to dampen our revenues from asset-based management fees, investment realizations or price appreciation, but their prospect can present us with opportunities to raise relatively larger amounts of capital for certain strategies, especially Distressed Debt. Additionally, weak financial markets may also present us with more opportunities to make investments for our funds at reduced prices. Conversely, strong financial markets generally increase the value of our funds’ investments, which positions us for growth in management fees that are based on asset value, and typically create favorable exit opportunities that enhance the prospect for incentive income and fund-related investment income proceeds. Those same markets may delay or diminish opportunities to deploy capital and thus management fees from certain of our funds.
In the third quarter, most major financial markets posted strong gains amid stabilizing energy prices and a continuation of generally accommodative monetary policies by major central banks. The S&P 500 Index rose 3.9%, the Russell 2000 Index gained 9.0% and non-U.S. equities, as measured by the MSCI ACWI ex-USA Index, advanced 5.4%. Emerging market equities rose 9.2%, as measured by the MSCI Emerging Markets Index, and European equity markets gained 5.5%, as measured by the MSCI Europe Index. U.S. high yield bonds, as

56

measured by the Citigroup U.S. High Yield Cash-Pay Capped Index, gained 5.4% for the quarter and 15.2% for the year-to-date period, while emerging market bonds rose 4.5% and 15.3% for the quarter and year-to-date period, as measured by the JP Morgan Corporate Emerging Markets Bond Index (CEMBI) High Yield. The 10-year U.S. Treasury yield increased slightly during the third quarter, to 1.6%, from 1.5% at the end of the second quarter, as developed world sovereign-debt interest rates remained near historic lows.
Against this backdrop, our closed-end fund strategies delivered an overall blended gross return for the quarter of 5.3%, bringing the year-to-date return to 8.9%. As of September 30, 2016, AUM was $99.8 billion and management fee-generating AUM was $78.7 billion. Company-wide total gross capital raised was $2.2 billion and $9.6 billion for the third quarter of 2016 and the 12 months ended September 30, 2016, respectively. As of September 30, 2016, uncalled capital commitments stood near a record high at $22.7 billion. Of these commitments, $13.3 billion were not yet generating management fees (so-called “Shadow AUM”).  The largest portion of the Shadow AUM, at nearly $8 billion, was represented by Oaktree Opportunities Fund Xb (“Opps Xb”).  Currently, we do not expect Opps Xb to start its investment period and thus begin generating management fees based on committed capital until late 2017.  Additionally, we currently expect that the remaining $5 billion of Shadow AUM will start generating management fees on a very gradual basis. Closed-end funds we are currently marketing include Opps Xb, Oaktree Infrastructure Fund, Oaktree European Capital Solutions Fund, Oaktree European Principal Fund IV and Oaktree Real Estate Debt Fund II.
Understanding Our Results—Consolidation of Oaktree Funds
In February 2015, the Financial Accounting Standards Board (“FASB”) amended its consolidation guidance, which changed the way a reporting entity should evaluate limited partnerships and similar entities for consolidation, how a decision maker’s fees affect the consolidation analysis, and how interests held by related parties affect the consolidation analysis. We adopted this guidance as of January 1, 2016 under the modified retrospective approach, which did not require prior periods to be recast. In connection with the adoption, we reevaluated all of our investment vehicles and other legal entities for consolidation and, as of January 1, 2016, deconsolidated substantially all of our previously consolidated investment funds because those funds, which had previously been evaluated as voting interest entities, became variable interest entities (“VIEs”) under the new consolidation guidance. We are not the primary beneficiary of these VIEs because our fee arrangements are not deemed to be variable interests, and we do not hold any other interests in those funds that are considered to be more than insignificant. The deconsolidation resulted in a reduction in total consolidated assets, liabilities, non-controlling redeemable interests in consolidated funds and unitholders' capital as of January 1, 2016 of $45.7 billion, $7.6 billion, $38.0 billion and $90.6 million, respectively. There was no impact on retained earnings or net income attributable to us. Please see note 2 to our condensed consolidated financial statements for more information.
Investment vehicles in which we have a significant investment, such as CLOs and certain Oaktree funds, remain consolidated under GAAP. When a CLO or fund is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the consolidated funds on a gross basis, and the majority of the economic interests in those consolidated funds, which are held by third-party investors, are reflected as debt obligations of CLOs or non-controlling interests in consolidated funds in the consolidated financial statements. All of the revenues earned by us as investment manager of the consolidated funds are eliminated in consolidation. However, because the eliminated amounts are earned from and funded by third-party investors, the consolidation of a fund does not impact net income or loss attributable to us.
Management makes operating decisions and assesses business performance based on financial and operating metrics and data that are presented without the consolidation of any funds. Note 17 to our condensed consolidated financial statements included elsewhere in this quarterly report includes information regarding our segment on a stand-alone basis. For a more detailed discussion of the factors that affect the results of operations of our segment, please see “—Segment Analysis” below.  
Revenues
Our business generates three types of segment revenue: management fees, incentive income and investment income. Management fees are billed monthly or quarterly based on annual rates and are typically earned for each of the funds that we manage. The contractual terms of management fees generally vary by fund structure. Management fees also may include performance-based fees earned from certain open-end and evergreen fund accounts. We also have the opportunity to earn incentive income from most of our closed-end and evergreen funds. Our closed-end funds generally provide that we receive incentive income only after our investors receive the return of all of their contributed capital plus an annual preferred return, typically 8%. Once this occurs, we generally receive as incentive income 80% of all distributions otherwise attributable to our investors, and those

57

investors receive the remaining 20% until we have received, as incentive income, 20% of all such distributions in excess of the contributed capital from the inception of the fund. Thereafter, provided the preferred return continues to be met, all such future distributions attributable to our investors are distributed 80% to those investors and 20% to us as incentive income. Our third segment revenue source, investment income, represents our pro-rata share of income or loss from our investments, generally in our capacity as general partner in our funds and as an investor in our CLOs and third-party managed funds and companies.
Our consolidated revenues reflect the elimination of all management fees, incentive income and investment income earned by us as investment manager of our consolidated funds. Investment income is presented within the other income (loss) section of our condensed consolidated statements of operations. Please see “Business—Structure and Operation of Our Business—Structure of Funds” in our annual report for a detailed discussion of the structure of our funds.
Expenses
Compensation and Benefits
Compensation and benefits expense reflects all compensation-related items not directly related to incentive income, investment income or the vesting of OCGH and Class A units, and includes salaries, bonuses, compensation based on management fees or a definition of profits, employee benefits, and phantom equity awards. Phantom equity awards represent liability-classified awards subject to vesting and remeasurement at the end of each reporting period. Phantom equity award expense reflects the vesting of those liability-classified awards, the equity distribution declared in the period and changes in the Class A unit trading price.
Equity-based Compensation
Equity-based compensation expense reflects the non-cash charge associated with grants of Class A units, OCGH units and OCGH equity value units (“EVUs”). Our GAAP-basis statements of operations include equity-based compensation expense for units granted both before and after our initial public offering. Our segment measure of adjusted net income differs from GAAP because it (a) excludes equity-based compensation expense for units granted before our initial public offering and (b) reflects EVUs that are classified as liability awards in our GAAP-basis statements of operations as equity-classified awards (please see “—Segment and Operating Metrics—Adjusted Net Income” below). 
As of September 30, 2016, there was $160.0 million of unrecognized compensation expense for GAAP purposes, which is expected to be recognized as expense in our GAAP consolidated financial statements over a weighted average vesting period of 3.8 years. As of September 30, 2016, there was $132.4 million of unrecognized compensation expense for segment reporting purposes, with the difference versus the GAAP-basis figure primarily representing unit grants made before our initial public offering.  The $132.4 million is expected to be recognized as expense in adjusted net income over a weighted average vesting period of approximately 3.6 years, as shown in the table below. These amounts are subject to change as a result of future unit grants, including those from our annual bonus plan, and possible modifications to award terms or changes in estimated forfeiture rates.
The following table summarizes the estimated amount of equity-based compensation expense to be included in adjusted net income:
Equity-based Compensation Expense Included in ANI
 
Last Three Months of 2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
 
(in millions)
Estimated expense from equity grants awarded through September 2016
 
$
12.6

 
$
44.0

 
$
31.9

 
$
23.1

 
$
6.8

 
$
14.0

 
$
132.4

Incentive Income Compensation
Incentive income compensation expense primarily reflects compensation directly related to segment incentive income, which generally consists of percentage interests (sometimes referred to as “points”) that we grant to our investment professionals associated with the particular fund that generated the segment incentive income, and secondarily, compensation directly related to investment income. There is no fixed percentage for the incentive income-related portion of this compensation, either by fund or strategy. In general, within a particular strategy more recent funds have a higher percentage of aggregate incentive income compensation expense than do older funds. The percentage that consolidated incentive income compensation expense represents of the particular period’s consolidated incentive income may not be meaningful because (a) the criteria for recognizing income and expense

58

differ under GAAP and thus may result in timing differences, and (b) for periods prior to the adoption of the deconsolidation guidance in the first quarter of 2016, most segment incentive income was eliminated in consolidation, whereas no incentive income compensation expense is eliminated in consolidation. For the most meaningful percentage relationship, please see “—Segment Analysis” below.
General and Administrative
General and administrative expense includes costs related to occupancy, outside auditors, tax professionals, legal advisers, research, consultants, travel and entertainment, communications and information services, foreign-exchange activity, insurance, changes in the contingent consideration liability, and other general items related directly to the Company’s operations. These expenses are net of amounts borne by fund investors and are not offset by credits attributable to fund investors’ non-controlling interests in consolidated funds.
Depreciation and Amortization
Depreciation and amortization expense includes costs associated with the purchase of furniture and equipment, capitalized software, office leasehold improvements, corporate aircraft and acquired intangibles. Furniture and equipment and capitalized software costs are depreciated using the straight-line method over the estimated useful life of the asset, which is generally three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the respective estimated useful life or the lease term. Company-owned aircraft are depreciated using the straight-line method over the estimated useful life. Acquired intangibles primarily relate to contractual rights and are amortized over their estimated useful lives, which range from three to seven years.
Consolidated Fund Expenses
Consolidated fund expenses consist primarily of costs, expenses and fees that are incurred by, or arise out of the operation and activities of or otherwise are related to, our consolidated funds, including, without limitation, travel expenses, professional fees, research and software expenses, insurance, and other costs associated with administering and supporting those funds. Inasmuch as most of these fund expenses are borne by third-party investors, they reduce the investors’ interests in the consolidated funds and have no impact on net income or loss attributable to the Company.
Other Income (Loss)
Interest Expense
Interest expense primarily reflects the interest expense of the consolidated funds, as well as the interest expense of Oaktree and its operating subsidiaries.
Interest and Dividend Income
Interest and dividend income consists of interest and dividend income earned on the investments held by our consolidated funds, interest income earned by Oaktree and its operating subsidiaries, and for periods prior to the adoption of the deconsolidation guidance in the first quarter of 2016, the consolidated funds’ net operating income from real estate-related activities.
Net Realized Gain on Consolidated Funds’ Investments
Net realized gain on consolidated funds’ investments consists of realized gains and losses arising from dispositions of investments held by our consolidated funds.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments reflects both unrealized gains and losses on investments held by our consolidated funds and the reversal upon disposition of investments of unrealized gains and losses previously recognized for those investments.
Investment Income
Investment income represents our pro-rata share of income or loss from our investments, generally in our capacity as general partner in our funds and as an investor in our CLOs and third-party managed funds and companies. Investment income, as reflected in our condensed consolidated statements of operations, excludes investment income earned by us from our consolidated funds.
 

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Other Income (Expense), Net
Other income (expense), net represents non-operating income or expense, including income related to amounts received for contractually reimbursable costs associated with certain arrangements made in connection with the Highstar acquisition.
Income Taxes
Oaktree is a publicly traded partnership. Because it satisfies the qualifying income test, it is not required to be treated as a corporation for U.S. federal and state income tax purposes; rather, it is taxed as a partnership. Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc., which are two of our five Intermediate Holding Companies and wholly-owned subsidiaries, are subject to U.S. federal and state income taxes. The remainder of Oaktree’s income is generally not subject to corporate-level taxation.
Oaktree’s effective tax rate is dependent on many factors, including the mix of revenues and expenses between our two corporate Intermediate Holding Companies that are subject to income tax and our three other Intermediate Holding Companies that are not; consequently, the effective tax rate is subject to significant variation from period to period. Oaktree’s effective tax rate used for interim periods is based on the estimated full year income tax rate. Certain items that cannot be reliably estimated, such as incentive income, are excluded from the estimated annual effective tax rate. The tax expense or benefit stemming from these items is recognized in the same period as the underlying income or expense.
Oaktree’s non-U.S. income or loss before taxes is generally not significant in relation to total pre-tax income or loss, and is generally more predictable because, unlike U.S. pre-tax income, it is not significantly impacted by unrealized gains or losses. Non-U.S. tax expense typically represents a disproportionately large percentage of total income tax expense because nearly all of our non-U.S. income or loss is subject to corporate-level income tax, whereas a substantial portion of our U.S.-based income or loss is not subject to corporate-level taxes. In addition, changes in the proportion of non-U.S. pre-tax income to total pre-tax income impact Oaktree’s effective tax rate to the extent non-U.S. rates differ from the combined U.S. federal and state tax rate.
Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets would be reduced by a valuation allowance if it becomes more likely than not that some portion or all of the deferred tax assets will not be realized.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests represents the ownership interests that third parties hold in entities that are consolidated in our financial statements. These interests fall into two categories:
•
Net Income Attributable to Non-controlling Interests in Consolidated Funds. This category represents the economic interests of the unaffiliated investors in the consolidated funds, as well as the equity interests held by third-party investors in CLOs that had not yet priced as of the respective period end. Those interests are primarily driven by the investment performance of the consolidated funds. In comparison to net income, this measure excludes segment results and other items solely attributable to the Company; and
•
Net Income Attributable to Non-controlling Interests in Consolidated Subsidiaries. This category primarily represents the economic interest in the Oaktree Operating Group owned by OCGH (“OCGH non-controlling interest”), as well as the economic interest in certain consolidated subsidiaries held by third parties. The OCGH non-controlling interest is determined at the Oaktree Operating Group level based on the weighted average proportionate share of Oaktree Operating Group units held by the OCGH unitholders. Inasmuch as the number of outstanding Oaktree Operating Group units corresponds with the total number of outstanding OCGH units and Class A units, changes in the economic interest held by the OCGH unitholders are driven by our additional issuances of Class A and OCGH units, as well as repurchases and forfeitures of, and exchanges between, Class A and OCGH units. Certain of our expenses, such as income tax and related administrative expenses of Oaktree Capital Group, LLC and its Intermediate Holding Companies, are solely attributable to the Class A unitholders. Please see note 11 to our condensed consolidated financial statements included elsewhere in this quarterly report for additional information on the economic interest in the Oaktree Operating Group owned by OCGH.

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Segment and Operating Metrics
Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients. Management makes operating decisions and assesses the performance of our business based on financial and operating metrics and data that are presented without the consolidation of any funds. For a detailed reconciliation of the segment results of operations to our condensed consolidated statements of operations, please see “—Segment Analysis” below and the “Segment Reporting” note to our condensed consolidated financial statements included elsewhere in this quarterly report. The data most important to our chief operating decision maker in assessing our performance are adjusted net income, adjusted net income-OCG, distributable earnings, distributable earnings-OCG, fee-related earnings and fee-related earnings-OCG.
We monitor certain operating metrics that are either common to the alternative asset management industry or that we believe provide important data regarding our business. As described below, these operating metrics include assets under management, management fee-generating assets under management, incentive-creating assets under management, accrued incentives (fund level), incentives created (fund level) and uncalled capital commitments.
Adjusted Net Income
Our chief operating decision maker uses adjusted net income (“ANI”) as a tool to help evaluate the financial performance of, and make resource allocations and other operating decisions for, our investment management segment. The components of revenues and expenses used in the determination of ANI do not give effect to the consolidation of the funds that we manage. Segment revenues include investment income (loss) that is classified in other income (loss) in the GAAP-basis statements of operations. Segment revenues and expenses also reflect Oaktree’s proportionate economic interest in Highstar, whereby amounts received for contractually reimbursable costs are classified for segment reporting as expenses and under GAAP as other income. In addition, ANI excludes the effect of (a) non-cash equity-based compensation expense related to unit grants made before our initial public offering, (b) acquisition-related items, including amortization of intangibles and changes in the contingent consideration liability, (c) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (d) income taxes, (e) other income or expenses applicable to OCG or its Intermediate Holding Companies, and (f) the adjustment for non-controlling interests. In the fourth quarter of 2015, the definition of ANI was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for ANI are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, but for ANI unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Additionally, for ANI, foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Incentive income and incentive income compensation expense are included in ANI when the underlying fund distributions are known or knowable as of the respective quarter end, which may be later than the time at which the same revenue or expense is included in the GAAP-basis statements of operations, for which the revenue standard is fixed or determinable and the expense standard is probable and reasonably estimable. CLO investments are carried at fair value for GAAP reporting, whereas for segment reporting they are carried at amortized cost, subject to any impairment charges. Investment income on CLO investments is recognized in ANI when cash distributions are received. Cash distributions are allocated between income and return of capital based on the effective yield method. ANI is calculated at the Operating Group level.
Among other factors, our accounting policy for recognizing incentive income and the inclusion of non-cash equity-based compensation expense related to unit grants made after our initial public offering likely make our calculation of ANI not directly comparable to economic net income or other similarly named measures utilized by certain other asset managers.
We calculate adjusted net income-OCG, or adjusted net income per Class A unit, a non-GAAP performance measure, to provide Class A unitholders with a measure that shows the portion of ANI attributable to their ownership. Adjusted net income-OCG represents ANI including the effect of (a) the OCGH non-controlling interest, (b) other income or expenses, such as income tax expense, applicable to OCG or its Intermediate Holding Companies and (c) any Operating Group income taxes attributable to OCG. Two of our Intermediate Holding Companies incur federal and state income taxes for their shares of Operating Group income. Generally, those two

61

corporate entities hold an interest in the Operating Group’s management fee-generating assets and a small portion of its incentive and investment income-generating assets. As a result, historically our fee-related earnings and investment income arising from our one-fifth ownership stake in DoubleLine Capital LP and its affiliates (collectively, “DoubleLine”) generally have been subject to corporate-level taxation, and most of our incentive income and other investment income generally has not been subject to corporate-level taxation. Thus, the blended effective income tax rate has generally tended to be higher to the extent that fee-related earnings and DoubleLine-related investment income represented a larger proportion of our ANI. Myriad other factors affect income tax expense and the effective income tax rate, and there can be no assurance that this historical relationship will continue going forward.
Distributable Earnings
Our chief operating decision maker uses distributable earnings as a tool to help evaluate the financial performance of, and make resource allocations and other operating decisions for, our segment. Distributable earnings is a non-GAAP performance measure derived from our segment results that we use to measure our earnings at the Operating Group level without the effects of the consolidated funds for the purpose of, among other things, assisting in the determination of equity distributions from the Operating Group. However, the declaration, payment and determination of the amount of equity distributions, if any, is at the sole discretion of our board of directors, which may change our distribution policy at any time.
Distributable earnings differs from ANI in that it excludes segment investment income or loss and includes the receipt of investment income or loss from distributions by our investments in funds and companies. Additionally, any impairment charges on our CLO investments included in ANI are, for distributable earnings purposes, amortized over the remaining investment period of the respective CLO to align with the timing of expected cash flows. In addition, distributable earnings differs from ANI in that it is net of Operating Group income taxes and excludes non-cash equity-based compensation expense.
Segment investment income or loss, which for equity-method investments represents our pro-rata share of income or loss, generally in our capacity as general partner in our funds and as an investor in our CLOs and third-party managed funds and companies, is largely non-cash in nature. By excluding segment investment income or loss, which is not directly available to fund our operations or make equity distributions, and including the portion of distributions from Oaktree and non-Oaktree funds to us that represents the income or loss component of the distributions and not a return of our capital contributions, as well as distributions from our investments in companies, distributable earnings aids us in measuring amounts that are actually available to meet our obligations under the tax receivable agreement and our liabilities for expenses incurred at OCG and the Intermediate Holding Companies, as well as for distributions to Class A and OCGH unitholders.
Distributable earnings-OCG, or distributable earnings per Class A unit, is a non-GAAP performance measure calculated to provide Class A unitholders with a measure that shows the portion of distributable earnings attributable to their ownership. Distributable earnings-OCG represents distributable earnings, including the effect of (a) the OCGH non-controlling interest, (b) expenses, such as current income tax expense, applicable to OCG or its Intermediate Holding Companies and (c) amounts payable under the tax receivable agreement. The income tax expense included in distributable earnings-OCG represents the implied current provision for income taxes calculated using an approach similar to that which is used in calculating the income tax provision for adjusted net income-OCG.
Fee-related Earnings
Fee-related earnings is a non-GAAP performance measure that we use to monitor the baseline earnings of our business. Fee-related earnings is comprised of segment management fees less segment operating expenses other than incentive income compensation expense and non-cash equity-based compensation expense. Fee-related earnings is considered baseline because it applies all cash compensation and benefits other than incentive income compensation expense, as well as all general and administrative expenses, to management fees, even though a significant portion of those expenses is attributable to incentive and investment income, and because it excludes all non-management fee revenue sources (such as earnings from our minority equity interest in DoubleLine). Fee-related earnings is presented before income taxes.
Fee-related earnings-OCG, or fee-related earnings per Class A unit, is a non-GAAP performance measure calculated to provide Class A unitholders with a measure that shows the portion of fee-related earnings attributable to their ownership. Fee-related earnings-OCG represents fee-related earnings including the effect of (a) the OCGH non-controlling interest, (b) other income or expenses, such as income tax expense, applicable to OCG or its

62

Intermediate Holding Companies and (c) any Operating Group income taxes attributable to OCG. Fee-related earnings-OCG income taxes are calculated excluding any segment incentive income or investment income (loss).
Among other factors, the exclusion of non-cash equity-based compensation expense may make our calculations of fee-related earnings and fee-related earnings-OCG not directly comparable to similarly named measures of other asset managers.
Assets Under Management
AUM generally refers to the assets we manage and equals the NAV of the assets we manage, the leverage on which management fees are charged, the undrawn capital that we are entitled to call from investors in our funds pursuant to their capital commitments and the aggregate par value of collateral assets and principal cash held by our CLOs. Our AUM includes amounts for which we charge no management fees. Our definition of AUM is not based on any definition contained in our operating agreement or the agreements governing the funds that we manage. Our calculation of AUM and the two AUM-related metrics below may not be directly comparable to the AUM metrics of other asset managers.
•
Management Fee-generating Assets Under Management. Management fee-generating AUM is a forward-looking metric and reflects the beginning AUM on which we will earn management fees in the following quarter. Our closed-end funds typically pay management fees based on committed capital, drawn capital or cost basis during the investment period, without regard to changes in NAV, and during the liquidation period on the lesser of (a) total funded capital or (b) the cost basis of assets remaining in the fund. The annual management fee rate generally remains unchanged from the investment period through the liquidation period. Our open-end and evergreen funds typically pay management fees based on their NAV, and our CLOs pay management fees based on the aggregate par value of collateral assets and principal cash held by them, as defined in the applicable CLO indentures.
•
Incentive-creating Assets Under Management. Incentive-creating AUM refers to the AUM that may eventually produce incentive income. It represents the NAV of our funds for which we are entitled to receive an incentive allocation, excluding CLOs and investments made by us and our employees and directors (which are not subject to an incentive allocation). All funds for which we are entitled to receive an incentive allocation are included in incentive-creating AUM, regardless of whether or not they are currently generating incentives. Incentive-creating AUM does not include undrawn capital commitments.
Accrued Incentives (Fund Level) and Incentives Created (Fund Level)
Our funds record as accrued incentives the incentive income that would be paid to us if the funds were liquidated at their reported values as of the date of the financial statements. Incentives created (fund level) refers to the gross amount of potential incentives generated by the funds during the period. We refer to the amount of accrued incentives recognized as revenue by us as segment incentive income. Amounts recognized by us as incentive income are no longer included in accrued incentives (fund level), the term we use for remaining fund-level accruals. The amount of incentives created may fluctuate substantially as a result of changes in the fair value of the underlying investments of the fund, as well as incentives created in excess of our typical 20% share due to catch-up allocations for applicable closed-end funds. Generally speaking, while in the catch-up layer, approximately 80% of any increase or decrease, respectively, in the fund’s NAV results in a commensurate amount of positive or negative incentives created (fund level).
The same performance and market risks inherent in incentives created (fund level) affect the ability to ultimately realize accrued incentives (fund level). One consequence of the accounting method we follow for incentives created (fund level) is that accrued incentives (fund level) is an off-balance sheet metric, rather than being an on-balance sheet receivable that could require reduction if fund performance suffers. We track accrued incentives (fund level) because it provides an indication of potential future value, though the timing and ultimate realization of that value are uncertain.  
Incentives created (fund level), incentive income and accrued incentives (fund level) are presented gross, without deduction for direct compensation expense that is owed to our investment professionals associated with the particular fund when we earn the incentive income. We call that charge “incentive income compensation expense.” Incentive income compensation expense varies by the investment strategy and vintage of the particular fund, among many other factors. In addition to incentive income compensation expense, the magnitude of the annual cash bonus pool is indirectly affected by the level of incentive income, net of its associated incentive income

63

compensation expense. The total charge related to the annual cash bonus pool, including the portion attributable to our incentive income, is reflected in the financial statement line item “compensation and benefits.”
Incentives created (fund level) often reflects investments measured at fair value and therefore is subject to risk of substantial fluctuation by the time the underlying investments are liquidated. We earn the incentive income, if any, that the fund is then obligated to pay us with respect to our incentive interest (generally 20%) in the profits of our unaffiliated investors, subject to an annual preferred return of typically 8%. Although GAAP currently allows the equivalent of incentives created (fund level) to be recognized as revenue by us under Method 2, we follow the Method 1 approach offered by GAAP. Our use of Method 1 reduces by a substantial degree the possibility that revenue recognized by us would be reversed in a subsequent period. For purposes of ANI and distributable earnings, we recognize incentive income when the underlying fund distributions are known or knowable as of the respective quarter end, as opposed to the fixed or determinable standard of Method 1. We track incentives created (fund level) because it provides an indication of the value for us currently being created by our investment activities and facilitates comparability with those companies in our industry that utilize the alternative accrual-based Method 2 for recognizing incentive income in their financial statements.
Uncalled Capital Commitments
Uncalled capital commitments represent undrawn capital commitments by partners (including Oaktree as general partner) of our closed-end funds through their investment periods and certain evergreen funds. If a closed-end fund distributes capital during its investment period, that capital is typically subject to possible recall, in which case it is included in uncalled capital commitments.  
Invested Capital
Invested capital reflects deployed capital, whether involving drawn or recycled equity capital, or borrowings from fund-level credit facilities.  This metric is used in connection with incentive-creating closed-end funds and certain evergreen funds.

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Consolidated Results of Operations
The following table sets forth our unaudited condensed consolidated statements of operations:  
Condensed Consolidated Statements of Operations
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
Management fees
$
190,974

 
$
47,106

 
$
584,542

 
$
148,848

Incentive income
99,256

 
3,385

 
242,894

 
3,949

Total revenues
290,230

 
50,491

 
827,436

 
152,797

Expenses:
 
 
 
 
 
 
 
Compensation and benefits
(97,552
)
 
(101,240
)
 
(308,959
)
 
(319,133
)
Equity-based compensation
(19,838
)
 
(12,494
)
 
(48,460
)
 
(40,283
)
Incentive income compensation
(47,385
)
 
(4,907
)
 
(92,653
)
 
(107,010
)
Total compensation and benefits expense
(164,775
)
 
(118,641
)
 
(450,072
)
 
(466,426
)
General and administrative
(32,252
)
 
(37,627
)
 
(113,032
)
 
(77,695
)
Depreciation and amortization
(3,867
)
 
(4,032
)
 
(12,076
)
 
(10,031
)
Consolidated fund expenses
(1,445
)
 
(30,218
)
 
(3,991
)
 
(118,269
)
Total expenses
(202,339
)
 
(190,518
)
 
(579,171
)
 
(672,421
)
Other income (loss):
 
 
 
 
 
 
 
Interest expense
(32,414
)
 
(56,023
)
 
(86,849
)
 
(155,334
)
Interest and dividend income
46,817

 
454,384

 
120,225

 
1,455,624

Net realized gain (loss) on consolidated funds’ investments
(1,436
)
 
318,267

 
8,647

 
1,650,645

Net change in unrealized appreciation (depreciation) on consolidated funds’ investments
10,231

 
(2,357,989
)
 
(15,742
)
 
(3,268,891
)
Investment income
65,758

 
10,342

 
136,205

 
38,718

Other income (expense), net
543

 
6,368

 
11,892

 
13,925

Total other income (loss)
89,499

 
(1,624,651
)
 
174,378

 
(265,313
)
Income (loss) before income taxes
177,390

 
(1,764,678
)
 
422,643

 
(784,937
)
Income taxes
(8,567
)
 
(1,893
)
 
(29,818
)
 
(15,253
)
Net income (loss)
168,823

 
(1,766,571
)
 
392,825

 
(800,190
)
Less:
 
 
 
 
 
 
 
Net (income) loss attributable to non-controlling interests in consolidated funds
(13,243
)
 
1,779,225

 
(15,618
)
 
1,034,521

Net income attributable to non-controlling interests in consolidated subsidiaries
(97,283
)
 
(10,767
)
 
(241,785
)
 
(174,377
)
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Revenues
Management Fees
Management fees increased $143.9 million, to $191.0 million for the three months ended September 30, 2016, from $47.1 million for the three months ended September 30, 2015. The increase reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016, inasmuch as management fees earned from the deconsolidated funds are no longer eliminated in consolidation.
Incentive Income
Incentive income increased $95.9 million, to $99.3 million for the three months ended September 30, 2016, from $3.4 million for the three months ended September 30, 2015. The increase reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.

65

Expenses
Compensation and Benefits
Compensation and benefits decreased $3.6 million, or 3.6%, to $97.6 million for the three months ended September 30, 2016, from $101.2 million for the three months ended September 30, 2015, reflecting an overall shift in compensation mix from cash to equity.
Equity-based Compensation
Equity-based compensation expense increased $7.3 million, or 58.4%, to $19.8 million for the three months ended September 30, 2016, from $12.5 million for the three months ended September 30, 2015. The increase reflected non-cash amortization expense associated with vesting of Class A and OCGH unit grants made to employees and directors subsequent to our 2012 initial public offering. Additionally, the current-year period included $4.9 million of expense resulting from the accelerated vesting of Class A and OCGH units related to employee departures.
Incentive Income Compensation
Incentive income compensation expense increased $42.5 million, to $47.4 million for the three months ended September 30, 2016, from $4.9 million for the three months ended September 30, 2015, primarily reflecting growth in segment incentive income.
General and Administrative
General and administrative expense decreased $5.3 million, or 14.1%, to $32.3 million for the three months ended September 30, 2016, from $37.6 million for the three months ended September 30, 2015. Excluding the impact of foreign currency-related items, which stemmed primarily from foreign-currency hedges used to economically hedge our non-U.S. dollar denominated revenues and expenses, general and administrative expense decreased $3.4 million, or 10.3%, to $29.5 million from $32.9 million, primarily reflecting lower Highstar-related expenses.
Consolidated Fund Expenses
Consolidated fund expenses decreased $28.8 million, or 95.4%, to $1.4 million for the three months ended September 30, 2016, from $30.2 million for the three months ended September 30, 2015. The decrease reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Other Income (Loss)
Interest Expense
Interest expense decreased $23.6 million, or 42.1%, to $32.4 million for the three months ended September 30, 2016, from $56.0 million for the three months ended September 30, 2015. The decrease reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Interest and Dividend Income
Interest and dividend income decreased $407.6 million, or 89.7%, to $46.8 million for the three months ended September 30, 2016, from $454.4 million for the three months ended September 30, 2015. The decrease reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Net Realized Gain (Loss) on Consolidated Funds’ Investments
Net realized gain (loss) on consolidated funds’ investments decreased $319.7 million, to a loss of $1.4 million for the three months ended September 30, 2016, from a gain of $318.3 million for the three months ended September 30, 2015. The decrease reflected our funds’ performance in each period, as well as the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
Net change in unrealized appreciation (depreciation) on consolidated funds’ investments increased to a gain of $10.2 million for the three months ended September 30, 2016, from a loss of $2,358.0 million for the three months ended September 30, 2015. Excluding the $319.7 million decline in net realized gain (loss) on consolidated funds’ investments, net change in unrealized appreciation (depreciation) on consolidated funds’ investments increased to a net gain of $8.8 million for the three months ended September 30, 2016, from a net loss of $2,039.7 million for the three months ended September 30, 2015. The increase reflected our funds’ performance in each

66

period, as well as the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Investment Income
Investment income increased $55.5 million, to $65.8 million for the three months ended September 30, 2016, from $10.3 million for the three months ended September 30, 2015. The increase primarily reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016. DoubleLine accounted for investment income of $17.7 million and $13.2 million in the current and prior-year periods, respectively, of which performance fees accounted for $1.9 million and $1.3 million, respectively.
Other Income (Expense), Net
Other income (expense), net was income of $0.5 million and $6.4 million for the three months ended September 30, 2016 and 2015, respectively. The current-year period included $4.9 million of income received for contractually reimbursable costs associated with the Highstar acquisition, largely offset by a $4.4 million impairment charge on our corporate plane. The prior-year period included $6.4 million of income received for Highstar-related reimbursable costs.
Income Taxes
Income taxes increased $6.7 million, to $8.6 million for the three months ended September 30, 2016, from $1.9 million for the three months ended September 30, 2015.  The increase reflected higher pre-tax income attributable to Class A unitholders, partially offset by a lower effective tax rate for the three months ended September 30, 2016. The effective tax rates applicable to Class A unitholders for the three months ended September 30, 2016 and 2015 were 11% and 27%, respectively, resulting from an estimated full-year effective rate of 17% for both periods.  The rate used for interim fiscal periods is based on an estimated full-year effective tax rate on income that can be reliably forecasted, combined with the tax expense in the current period on incentive income and any other income that cannot be reliably estimated. We expect variability in tax rates between quarters and full years, because the effective tax rate is a function of the mix of income and other factors, each of which can have a material impact on the particular period’s income tax expense and may vary significantly within or between years.  Please see “—Understanding Our Results—Consolidation of Oaktree Funds.”
Net (Income) Loss Attributable to Non-controlling Interests in Consolidated Funds
Net (income) loss attributable to non-controlling interests in consolidated funds increased to income of $13.2 million for the three months ended September 30, 2016, as compared to a loss of $1,779.2 million for the three months ended September 30, 2015. The increase reflected our funds’ performance in each period, as well as the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016. These effects are described in more detail under “—Other Income (Loss)” above.
Net Income Attributable to Oaktree Capital Group, LLC
Net income attributable to Oaktree Capital Group, LLC increased $56.4 million, to $58.3 million for the three months ended September 30, 2016, from $1.9 million for the three months ended September 30, 2015. The increase was primarily attributable to higher segment profits, as well as a larger allocation of income to OCG based on the weighted average number of Class A units outstanding.
Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Revenues
Management Fees
Management fees increased $435.7 million, to $584.5 million for the nine months ended September 30, 2016, from $148.8 million for the nine months ended September 30, 2015. The increase reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Incentive Income
Incentive income increased $239.0 million, to $242.9 million for the nine months ended September 30, 2016, from $3.9 million for the nine months ended September 30, 2015. The increase reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.

67

Expenses
Compensation and Benefits
Compensation and benefits decreased $10.1 million, or 3.2%, to $309.0 million for the nine months ended September 30, 2016, from $319.1 million for the nine months ended September 30, 2015, primarily reflecting an overall shift in compensation mix from cash to equity.
Equity-based Compensation
Equity-based compensation expense increased $8.2 million, or 20.3%, to $48.5 million for the nine months ended September 30, 2016, from $40.3 million for the nine months ended September 30, 2015. The increase reflected non-cash amortization expense associated with vesting of Class A and OCGH unit grants made to employees and directors subsequent to our 2012 initial public offering. Additionally, the current-year period included incremental expense resulting from the accelerated vesting of Class A and OCGH units related to employee departures.
Incentive Income Compensation
Incentive income compensation expense decreased $14.3 million, or 13.4%, to $92.7 million for the nine months ended September 30, 2016, from $107.0 million for the nine months ended September 30, 2015. Incentive income compensation expense declined while segment incentive income increased, primarily due to timing differences between the recognition of segment incentive income and incentive income compensation expense, as well as catch-up tax distributions related to incentive interests previously awarded to certain investment professionals.
General and Administrative
General and administrative expense increased $35.3 million, or 45.4%, to $113.0 million for the nine months ended September 30, 2016, from $77.7 million for the nine months ended September 30, 2015. Excluding the impact of foreign currency-related items, which stemmed primarily from foreign-currency hedges used to economically hedge our non-U.S. dollar denominated revenues and expenses, general and administrative expense increased $1.1 million, or 1.1%, to $98.7 million from $97.6 million. The increase reflected higher legal, technology, marketing, staff augmentation and placement costs, largely offset by lower Highstar-related expenses and other professional fees.
Depreciation and Amortization
Depreciation and amortization expense increased $2.1 million, or 21.0%, to $12.1 million for the nine months ended September 30, 2016, from $10.0 million for the nine months ended September 30, 2015. The increase primarily reflected amortization of leasehold improvements associated with office space expansion.
Consolidated Fund Expenses
Consolidated fund expenses decreased $114.3 million, or 96.6%, to $4.0 million for the nine months ended September 30, 2016, from $118.3 million for the nine months ended September 30, 2015. The decrease reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Other Income (Loss)
Interest Expense
Interest expense decreased $68.5 million, or 44.1%, to $86.8 million for the nine months ended September 30, 2016, from $155.3 million for the nine months ended September 30, 2015. The decrease reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Interest and Dividend Income
Interest and dividend income decreased $1,335.4 million, or 91.7%, to $120.2 million for the nine months ended September 30, 2016, from $1,455.6 million for the nine months ended September 30, 2015. The decrease reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Net Realized Gain (Loss) on Consolidated Funds’ Investments
Net realized gain (loss) on consolidated funds’ investments decreased $1,642.0 million, or 99.5%, to a gain of $8.6 million for the nine months ended September 30, 2016, from $1,650.6 million for the nine months ended

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September 30, 2015. The decrease primarily reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
The net change in unrealized appreciation (depreciation) on consolidated funds’ investments was a loss of $15.7 million and $3,268.9 million for the nine months ended September 30, 2016 and 2015, respectively. Excluding the $1,642.0 million decline in net realized gain (loss) on consolidated funds’ investments, the net change in unrealized appreciation (depreciation) on consolidated funds’ investments was a net loss of $7.1 million and $1,618.2 million for the nine months ended September 30, 2016 and 2015, respectively. The smaller net loss primarily reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016.
Investment Income
Investment income increased $97.5 million, to $136.2 million for the nine months ended September 30, 2016, from $38.7 million for the nine months ended September 30, 2015. The increase primarily reflected the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016. DoubleLine accounted for investment income of $49.3 million and $40.4 million in the nine months ended September 30, 2016 and 2015, respectively, of which performance fees accounted for $3.9 million in each period.
Other Income (Expense), Net
Other income (expense), net decreased $2.0 million, or 14.4%, to income of $11.9 million for the nine months ended September 30, 2016, from $13.9 million for the nine months ended September 30, 2015. The current-year period included $16.3 million of income received for contractually reimbursable costs associated with the Highstar acquisition, partially offset by a $4.4 million impairment charge on our corporate plane. The prior-year period included $17.5 million of income received for Highstar-related reimbursable costs, partially offset by a $3.6 million loss associated with certain non-operating corporate activities.
Income Taxes
Income taxes increased $14.5 million, to $29.8 million for the nine months ended September 30, 2016, from $15.3 million for the nine months ended September 30, 2015, reflecting higher pre-tax income attributable to Class A unitholders. The effective tax rate applicable to Class A unitholders for both the nine months ended September 30, 2016 and 2015 was 17%.  The rate used for interim fiscal periods is based on an estimated full-year effective tax rate on income that can be reliably forecasted, combined with the tax expense in the current period on incentive income and any other income that cannot be reliably estimated. We expect variability in tax rates between quarters and full years, because the effective tax rate is a function of the mix of income and other factors, each of which can have a material impact on the particular period’s income tax expense and may vary significantly within or between years.  Please see “—Understanding Our Results—Consolidation of Oaktree Funds.”
Net (Income) Loss Attributable to Non-controlling Interests in Consolidated Funds
Net (income) loss attributable to non-controlling interests in consolidated funds increased $1,050.1 million, to income of $15.6 million for the nine months ended September 30, 2016, from a loss of $1,034.5 million for the nine months ended September 30, 2015. The increase was primarily driven by our funds’ performance in each period, as well as the deconsolidation of substantially all of Oaktree’s investment funds effective the first quarter of 2016. These effects are described in more detail under “—Other Income (Loss)” above.
Net Income Attributable to Oaktree Capital Group, LLC
Net income attributable to Oaktree Capital Group, LLC increased $75.4 million, to $135.4 million for the nine months ended September 30, 2016, from $60.0 million for the nine months ended September 30, 2015. The increase was primarily attributable to higher segment profits, as well as a larger allocation of income to OCG based on the weighted average number of Class A units outstanding.


69

Segment Financial Data
The following table presents segment financial data:  
Segment Statements of Operations Data: (1)
As of or for the Three Months
Ended September 30,
 
As of or for the Nine Months
Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per unit data or as otherwise indicated)
Revenues:
 
 
 
 
 
 
 
Management fees
$
194,349

 
$
185,766

 
$
593,069

 
$
566,058

Incentive income
99,731

 
16,925

 
283,966

 
230,952

Investment income (loss)
70,928

 
(19,950
)
 
133,730

 
56,873

Total revenues
365,008

 
182,741

 
1,010,765

 
853,883

Expenses:
 
 
 
 
 
 
 
Compensation and benefits
(94,624
)
 
(97,348
)
 
(298,067
)
 
(310,996
)
Equity-based compensation
(16,041
)
 
(8,836
)
 
(39,189
)
 
(27,760
)
Incentive income compensation
(47,378
)
 
(7,596
)
 
(132,534
)
 
(127,252
)
General and administrative
(29,258
)
 
(30,279
)
 
(91,339
)
 
(90,181
)
Depreciation and amortization
(2,866
)
 
(3,031
)
 
(9,074
)
 
(7,027
)
Total expenses
(190,167
)
 
(147,090
)
 
(570,203
)
 
(563,216
)
Adjusted net income before interest and other income (expense)
174,841

 
35,651

 
440,562

 
290,667

Interest expense, net of interest income (2) 
(7,799
)
 
(8,388
)
 
(24,458
)
 
(26,103
)
Other income (expense), net
(4,902
)
 
(283
)
 
(6,294
)
 
(2,279
)
Adjusted net income
$
162,140

 
$
26,980

 
$
409,810

 
$
262,285

 
 
 
 
 
 
 
 
Adjusted net income-OCG
$
57,908

 
$
7,194

 
$
137,750

 
$
65,339

Adjusted net income per Class A unit
0.92

 
0.15

 
2.21

 
1.38

Distributable earnings
141,477

 
96,979

 
394,708

 
343,315

Distributable earnings-OCG
51,223

 
25,678

 
137,948

 
89,046

Distributable earnings per Class A unit
0.82

 
0.53

 
2.21

 
1.88

Fee-related earnings
67,601

 
55,108

 
194,589

 
157,854

Fee-related earnings-OCG
23,869

 
17,407

 
70,745

 
46,361

Fee-related earnings per Class A unit
0.38

 
0.36

 
1.13

 
0.98

 
 
 
 
 
 
 
 
Weighted average number of Operating Group units outstanding
154,945

 
153,945

 
154,605

 
153,676

Weighted average number of Class A units outstanding
62,755

 
48,440

 
62,424

 
47,304

 
 
 
 
 
 
 
 
Operating Metrics:
 
 
 
 
 
 
 
Assets under management (in millions):
 
 
 
 
 
 
 
Assets under management
$
99,834

 
$
100,237

 
$
99,834

 
$
100,237

Management fee-generating assets under management
78,700

 
76,489

 
78,700

 
76,489

Incentive-creating assets under management 
32,440

 
33,245

 
32,440

 
33,245

Uncalled capital commitments 
22,663

 
20,115

 
22,663

 
20,115

Accrued incentives (fund level):
 
 
 
 
 
 
 
Incentives created (fund level) 
422,685

 
(187,642
)
 
547,557

 
13,765

Incentives created (fund level), net of associated incentive income compensation expense 
153,817

 
(106,237
)
 
212,609

 
(6,004
)
Accrued incentives (fund level) 
1,848,808

 
1,732,220

 
1,848,808

 
1,732,220

Accrued incentives (fund level), net of associated incentive income compensation expense
872,716

 
890,219

 
872,716

 
890,219


70

 
 
 
 
 
(1)
Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients. The components of revenues and expenses used in determining ANI do not give effect to the consolidation of the funds that we manage. Segment revenues include investment income (loss) that is classified in other income (loss) in the GAAP-basis statements of operations. Segment revenues and expenses also reflect Oaktree's proportionate economic interest in Highstar, whereby amounts received for contractually reimbursable costs are classified for segment reporting as expenses and under GAAP as other income. In addition, ANI excludes the effect of (a) non-cash equity-based compensation expense related to unit grants made before our initial public offering, (b) acquisition-related items, including amortization of intangibles and changes in the contingent consideration liability, (c) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting, (d) income taxes, (e) other income or expenses applicable to OCG or its Intermediate Holding Companies, and (f) the adjustment for non-controlling interests. In the fourth quarter of 2015, the definition of ANI was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for ANI are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, but for ANI unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Additionally, for ANI, foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Incentive income and incentive income compensation expense are included in ANI when the underlying fund distributions are known or knowable as of the respective quarter end, which may be later than the time at which the same revenue or expense is included in the GAAP-basis statements of operations, for which the revenue standard is fixed or determinable and the expense standard is probable and reasonably estimable. CLO investments are carried at fair value for GAAP reporting, whereas for segment reporting they are carried at amortized cost, subject to any impairment charges. Investment income on CLO investments is recognized in ANI when cash distributions are received. Cash distributions are allocated between income and return of capital based on the effective yield method. ANI is calculated at the Operating Group level. For a detailed description of our segment and operating metrics, please see “—Segment and Operating Metrics” above.
(2)
Interest income was $1.7 million for both the three months ended September 30, 2016 and 2015, and $4.6 million and $3.9 million for the nine months ended September 30, 2016 and 2015, respectively.





71

Operating Metrics
We monitor certain operating metrics that are either common to the alternative asset management industry or that we believe provide important data regarding our business. These operating metrics include AUM, management fee-generating AUM, incentive-creating AUM, incentives created (fund level), accrued incentives (fund level) and uncalled capital commitments.
Assets Under Management
 
As of
 
September 30, 2016
 
June 30,
2016
 
September 30, 2015
Assets Under Management:
(in millions)
Closed-end funds
$
60,488

 
$
59,576

 
$
59,318

Open-end funds
34,197

 
33,667

 
35,914

Evergreen funds
5,149

 
4,881

 
5,005

Total
$
99,834

 
$
98,124

 
$
100,237


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Change in Assets Under Management:
(in millions)
Beginning balance
$
98,124

 
$
103,060

 
$
97,359

 
$
90,831

Closed-end funds:
 
 
 
 
 
 
 
Capital commitments/other (1) 
1,182

 
1,705

 
3,937

 
15,886

Distributions for a realization event/other (2) 
(2,028
)
 
(560
)
 
(5,262
)
 
(3,902
)
Change in uncalled capital commitments for funds entering or in liquidation (3) 
(22
)
 
20

 
(9
)
 
(852
)
Foreign-currency translation
91

 
15

 
244

 
(512
)
Change in market value (4) 
1,616

 
(1,105
)
 
2,331

 
(117
)
Change in applicable leverage
73

 
229

 
(183
)
 
612

Open-end funds:
 
 
 
 
 
 
 
Contributions
914

 
979

 
2,651

 
4,190

Redemptions
(2,105
)
 
(1,515
)
 
(5,101
)
 
(4,133
)
Foreign-currency translation
65

 
(31
)
 
161

 
(341
)
Change in market value (4) 
1,656

 
(2,332
)
 
3,284

 
(1,254
)
Evergreen funds:
 
 
 
 
 
 
 
Contributions or new capital commitments
91

 
57

 
239

 
288

Redemptions or distributions/other
(55
)
 
(41
)
 
(322
)
 
(217
)
Foreign-currency translation
(1
)
 
(1
)
 
(9
)
 
—

Change in market value (4) 
233

 
(243
)
 
514

 
(242
)
Ending balance
$
99,834

 
$
100,237

 
$
99,834

 
$
100,237

 
 
 
 
 
(1)
These amounts represent capital commitments, as well as the aggregate par value of collateral assets and principal cash related to new CLO formations.
(2)
These amounts represent distributions for a realization event, tax-related distributions, reductions in the par value of collateral assets and principal cash resulting from the repayment of debt as return of principal by CLOs, and recallable distributions at the end of the investment period.
(3)
The change in uncalled capital commitments reflects declines attributable to funds entering their liquidation periods, as well as capital contributions to funds in their liquidation periods for deferred purchase obligations or other reasons.
(4)
The change in market value reflects the change in NAV of our funds, less management fees and other fund expenses, as well as changes in the aggregate par value of collateral assets and principal cash held by CLOs.

72

Management Fee-generating Assets Under Management
 
As of
 
September 30, 2016
 
June 30,
2016
 
September 30, 2015
Management Fee-generating Assets Under Management:
(in millions)
Closed-end funds:
 
 
 
 
 
Senior Loans
$
6,887

 
$
6,909

 
$
6,799

Other closed-end funds
33,575

 
35,096

 
30,228

Open-end funds
34,148

 
33,597

 
35,840

Evergreen funds
4,090

 
3,914

 
3,622

Total
$
78,700

 
$
79,516

 
$
76,489


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Change in Management Fee-generating Assets Under Management:
2016
 
2015
 
2016
 
2015
(in millions)
Beginning balance
$
79,516

 
$
78,596

 
$
78,897

 
$
78,079

Closed-end funds:
 
 
 
 
 
 
 
Capital commitments to funds that pay fees based on committed capital/other (1) 
111

 
503

 
1,123

 
1,224

Capital drawn by funds that pay fees based on drawn capital, NAV or cost basis
345

 
387

 
926

 
854

Change attributable to funds in liquidation (2) 
(1,462
)
 
(272
)
 
(3,305
)
 
(1,887
)
Change in uncalled capital commitments for funds entering or in liquidation that pay fees based on committed capital (3) 
(512
)
 
—

 
(499
)
 
(471
)
Distributions by funds that pay fees based on NAV/other (4) 
(283
)
 
(44
)
 
(497
)
 
(289
)
Foreign-currency translation
75

 
8

 
123

 
(321
)
Change in market value (5) 
131

 
(118
)
 
338

 
(123
)
Change in applicable leverage
52

 
347

 
(36
)
 
768

Open-end funds:
 
 
 
 
 
 
 
Contributions
914

 
978

 
2,654

 
4,175

Redemptions
(2,074
)
 
(1,515
)
 
(5,077
)
 
(4,117
)
Foreign-currency translation
65

 
(31
)
 
161

 
(340
)
Change in market value
1,646

 
(2,323
)
 
3,275

 
(1,261
)
Evergreen funds:
 
 
 
 
 
 
 
Contributions or capital drawn by funds that pay fees based on drawn capital or NAV
39

 
213

 
466

 
614

Redemptions or distributions
(97
)
 
(10
)
 
(334
)
 
(165
)
Change in market value
234

 
(230
)
 
485

 
(251
)
Ending balance
$
78,700

 
$
76,489

 
$
78,700

 
$
76,489

 
 
 
 
 
(1)
These amounts represent capital commitments to funds that pay fees based on committed capital, as well as the aggregate par value of collateral assets and principal cash related to new CLO formations.
(2)
These amounts represent the change for funds that pay fees based on the lesser of funded capital or cost basis during the liquidation period, as well as recallable distributions at the end of the investment period. For most closed-end funds, management fees are charged during the liquidation period on the lesser of (a) total funded capital or (b) the cost basis of assets remaining in the fund, with the cost basis of assets generally calculated by excluding cash balances. Thus, changes in fee basis during the liquidation period are not dependent on distributions made from the fund; rather, they are tied to the cost basis of the fund’s investments, which typically declines as the fund sells assets.
(3)
The change in uncalled capital commitments reflects declines attributable to funds entering their liquidation periods, as well as capital contributions to funds in their liquidation periods for deferred purchase obligations or other reasons.
(4)
These amounts represent distributions by funds that pay fees based on NAV, as well as reductions in the par value of collateral assets and principal cash resulting from the repayment of debt as return of principal by CLOs.
(5)
The change in market value reflects certain funds that pay management fees based on NAV and leverage, as applicable, as well as changes in the aggregate par value of collateral assets and principal cash held by CLOs.

73

A reconciliation of AUM to management fee-generating AUM is set forth below:  
 
As of
Reconciliation of Assets Under Management to Management Fee-generating Assets Under Management:
September 30, 2016
 
June 30,
2016
 
September 30, 2015
(in millions)
Assets under management
$
99,834

 
$
98,124

 
$
100,237

Difference between assets under management and committed capital or cost basis for applicable closed-end funds (1) 
(4,449
)
 
(2,392
)
 
(3,381
)
Undrawn capital commitments to closed-end funds that have not yet commenced their investment periods
(9,552
)
 
(9,278
)
 
(14,544
)
Undrawn capital commitments to funds for which management fees are based on drawn capital, NAV or cost basis
(3,720
)
 
(3,828
)
 
(3,279
)
Oaktree’s general partner investments in management fee-generating funds
(1,987
)
 
(1,745
)
 
(1,240
)
Funds that are no longer paying management fees and co-investments that pay no management fees
(1,426
)
 
(1,365
)
 
(1,304
)
Management fee-generating assets under management
$
78,700

 
$
79,516

 
$
76,489

 
 
 
 
 
(1)
This difference is not applicable to closed-end funds that pay management fees based on NAV or leverage.
The period-end weighted average annual management fee rates applicable to the respective management fee-generating AUM balances above are set forth below.
 
As of
 
September 30, 2016
 
June 30,
2016
 
September 30, 2015
Weighted Average Annual Management Fee Rates:
 
 
 
 
 
Closed-end funds:
 
 
 
 
 
Senior Loans
0.50
%
 
0.50
%
 
0.50
%
Other closed-end funds
1.51

 
1.51

 
1.53

Open-end funds
0.46

 
0.46

 
0.47

Evergreen funds
1.22

 
1.22

 
1.46

Overall
0.95

 
0.97

 
0.94

Incentive-creating Assets Under Management
Incentive-creating AUM is set forth below. As of September 30, 2016, June 30, 2016 and September 30, 2015, the portion of incentive-creating AUM generating incentives at the fund level was $20.0 billion, $17.9 billion and $19.2 billion, respectively. Incentive-creating AUM does not include undrawn capital commitments. 
 
As of
 
September 30, 2016
 
June 30,
2016
 
September 30, 2015
Incentive-creating Assets Under Management:
(in millions)
Closed-end funds
$
29,241

 
$
28,462

 
$
31,290

Evergreen funds
3,199

 
1,910

 
1,955

Total
$
32,440

 
$
30,372

 
$
33,245

Three Months Ended September 30, 2016
AUM increased $1.7 billion, or 1.7%, to $99.8 billion as of September 30, 2016, from $98.1 billion as of June 30, 2016. The increase primarily reflected $3.5 billion in aggregate market-value gains and $1.2 billion of aggregate capital inflows for closed-end funds, partially offset by $2.0 billion of aggregate distributions to closed-end fund investors and $1.2 billion of net outflows from open-end funds.
Management fee-generating AUM, a forward-looking metric, decreased $0.8 billion, or 1.0%, to $78.7 billion as of September 30, 2016, from $79.5 billion as of June 30, 2016. The decrease primarily reflected a $2.0 billion aggregate decline attributable to closed-end funds in liquidation and uncalled capital commitments for closed-end

74

funds entering or in liquidation and $1.2 billion of net outflows from open-end funds. These declines were largely offset by $2.0 billion of aggregate market-value gains.
Incentive-creating AUM increased $2.0 billion, or 6.6%, to $32.4 billion as of September 30, 2016, from $30.4 billion as of June 30, 2016, reflecting the net effect of drawdowns by closed-end funds, market-value gains, distributions from closed-end funds and other adjustments.
Three Months Ended September 30, 2015
AUM declined $2.9 billion, or 2.8%, to $100.2 billion as of September 30, 2015, from $103.1 billion as of June 30, 2015. The decrease primarily reflected $3.7 billion in aggregate market-value declines, partially offset by $1.9 billion in aggregate capital inflows and fee-generating leverage for closed-end funds.
Management fee-generating AUM declined $2.1 billion, or 2.7%, to $76.5 billion as of September 30, 2015, from $78.6 billion as of June 30, 2015. The decrease primarily reflected $2.7 billion in aggregate market-value declines, partially offset by $0.9 billion attributable to CLOs and capital commitments and fee-generating leverage for closed-end funds.
Incentive-creating AUM declined $0.7 billion, or 2.1%, to $33.2 billion as of September 30, 2015, from $33.9 billion as of June 30, 2015, primarily attributable to market-value declines and distributions from closed-end funds, partially offset by drawdowns by closed-end funds.
Nine Months Ended September 30, 2016
AUM increased $2.4 billion, or 2.5%, to $99.8 billion as of September 30, 2016, from $97.4 billion as of December 31, 2015. The increase primarily reflected $6.1 billion in aggregate market-value gains and $3.9 billion of aggregate capital inflows for closed-end funds, partially offset by $5.3 billion of distributions to closed-end fund investors and $2.5 billion of net outflows from open-end funds.
Management fee-generating AUM, a forward-looking metric, decreased $0.2 billion, or 0.3%, to $78.7 billion as of September 30, 2016, from $78.9 billion as of December 31, 2015. The decrease reflected an aggregate $3.8 billion decline attributable to closed-end funds in liquidation and uncalled capital commitments for closed-end funds entering or in liquidation and $2.4 billion of net outflows from open-end funds. These declines were largely offset by $4.1 billion of aggregate market-value gains and an aggregate $2.0 billion increase from capital drawn by funds that pay fees based on drawn capital, NAV or cost basis, additional capital commitments for Oaktree Opportunities Fund X (“Opps X”) and Oaktree Real Estate Opportunities Fund VII (“ROF VII”), and new CLOs.
Incentive-creating AUM increased $0.5 billion, or 1.6%, to $32.4 billion as of September 30, 2016, from $31.9 billion as of December 31, 2015, primarily reflecting drawdowns by closed-end funds and aggregate market-value gains, partially offset by distributions from closed-end funds.
Nine Months Ended September 30, 2015
AUM grew $9.4 billion, or 10.4%, to $100.2 billion as of September 30, 2015, from $90.8 billion as of December 31, 2014. The increase reflected $16.5 billion of capital inflows and fee-generating leverage for closed-end funds, partially offset by $3.9 billion of distributions to closed-end fund investors, $1.6 billion of aggregate market-value declines, a $0.9 billion decline in uncalled capital commitments for closed-end funds entering or in liquidation and $0.9 billion of unfavorable foreign-currency translation.
Management fee-generating AUM decreased $1.6 billion, or 2.0%, to $76.5 billion as of September 30, 2015, from $78.1 billion as of December 31, 2014. The decrease reflected declines of $1.9 billion attributable to closed-end funds in liquidation, $1.6 billion of aggregate market-value changes in funds for which management fees are based on NAV and $0.7 billion of unfavorable foreign-currency translation. These declines were partially offset by an aggregate $3.5 billion of capital inflows to closed-end funds, fee-generating leverage, and drawdowns or contributions by closed-end and evergreen funds for which management fees are based on drawn capital or NAV.
Incentive-creating AUM declined $0.7 billion, or 2.1%, to $33.2 billion as of September 30, 2015, from $33.9 billion as of December 31, 2014, primarily attributable to distributions from closed-end funds and market-value declines, partially offset by drawdowns by closed-end funds.

75

Accrued Incentives (Fund Level) and Incentives Created (Fund Level)
Accrued incentives (fund level), gross and net of incentive income compensation expense, as well as changes in accrued incentives (fund level), are set forth below.  
 
As of or for the Three Months
Ended September 30,
 
As of or for the Nine Months
Ended September 30,
 
2016
 
2015
 
2016
 
2015
Accrued Incentives (Fund Level):
(in thousands)
Beginning balance
$
1,525,854

 
$
1,936,787

 
$
1,585,217

 
$
1,949,407

Incentives created (fund level):
 
 
 
 
 
 
 
Closed-end funds
402,842

 
(187,358
)
 
522,847

 
13,414

Evergreen funds
19,843

 
(284
)
 
24,710

 
351

Total incentives created (fund level)
422,685

 
(187,642
)
 
547,557

 
13,765

Less: segment incentive income recognized by us
(99,731
)
 
(16,925
)
 
(283,966
)
 
(230,952
)
Ending balance
$
1,848,808

 
$
1,732,220

 
$
1,848,808

 
$
1,732,220

Accrued incentives (fund level), net of associated incentive income compensation expense
$
872,716

 
$
890,219

 
$
872,716

 
$
890,219

As of September 30, 2016 and 2015, the portion of net accrued incentives (fund level) represented by funds that was currently paying incentives was $224.9 million and $317.0 million, respectively, with the remainder arising from funds that as of that date were not at the stage of their cash distribution waterfall where Oaktree was entitled to receive incentives, other than possibly tax-related distributions.
As of September 30, 2016, $690.2 million, or 79%, of the net accrued incentives (fund level) was in funds in their liquidation period, and approximately 35% of the assets underlying total net accrued incentives (fund level) were Level I or Level II securities. Please see “—Critical Accounting Policies—Investments, at Fair Value—Non-publicly Traded Equity and Real Estate Investments” for a discussion of the fair-value hierarchy level established by GAAP.
Three Months Ended September 30, 2016 and 2015
Incentives created (fund level) was $422.7 million for the three months ended September 30, 2016, primarily consisting of $329.5 million of incentives created (fund level) from Control Investing funds and $55.6 million from Distressed Debt funds.
Incentives created (fund level) was negative $187.6 million for the three months ended September 30, 2015, primarily reflecting negative incentives created (fund level) of $122.8 million from Distressed Debt funds and $102.3 million from Control Investing funds.
Nine Months Ended September 30, 2016 and 2015
Incentives created (fund level) was $547.6 million for the nine months ended September 30, 2016, reflecting $433.8 million of incentives created (fund level) from Control Investing funds, $39.1 million from Real Estate funds and $37.4 million from Distressed Debt funds.
Incentives created (fund level) was $13.8 million for the nine months ended September 30, 2015, reflecting incentives created (fund level) of $137.4 million from Control Investing funds, $91.1 million from Real Estate funds and $23.9 million from Mezzanine funds, largely offset by negative incentives created (fund level) of $248.9 million from Distressed Debt funds.
Uncalled Capital Commitments
As of September 30, 2016, June 30, 2016, and September 30, 2015, uncalled capital commitments were $22.7 billion, $22.8 billion and $20.1 billion, respectively. Invested capital during the three and 12 months ended September 30, 2016 aggregated $2.2 billion and $8.1 billion, respectively, as compared with $1.8 billion and $9.0 billion for the comparable 2015 periods.

76

Segment Analysis
Our business is comprised of one segment, our investment management segment, which consists of the investment management services that we provide to our clients. Management makes operating decisions and assesses the performance of our business based on financial and operating metrics and data that are presented without the consolidation of any funds. For a detailed reconciliation of the segment results of operations to our condensed consolidated statements of operations, please see “—Distributable Earnings” and “—Fee-related Earnings” below and the “Segment Reporting” note to our condensed consolidated financial statements included elsewhere in this quarterly report. The data most important to our chief operating decision maker in assessing our performance are adjusted net income, adjusted net income-OCG, distributable earnings, distributable earnings-OCG, fee-related earnings and fee-related earnings-OCG.
Adjusted Net Income (1) 
ANI and adjusted net income-OCG, as well as per unit data, are set forth below:  
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per unit data)
Revenues:
 
 
 
 
 
 
 
Management fees
$
194,349

 
$
185,766

 
$
593,069

 
$
566,058

Incentive income
99,731

 
16,925

 
283,966

 
230,952

Investment income (loss)
70,928

 
(19,950
)
 
133,730

 
56,873

Total revenues
365,008

 
182,741

 
1,010,765

 
853,883

Expenses:
 
 
 
 
 
 
 
Compensation and benefits
(94,624
)
 
(97,348
)
 
(298,067
)
 
(310,996
)
Equity-based compensation
(16,041
)
 
(8,836
)
 
(39,189
)
 
(27,760
)
Incentive income compensation
(47,378
)
 
(7,596
)
 
(132,534
)
 
(127,252
)
General and administrative
(29,258
)
 
(30,279
)
 
(91,339
)
 
(90,181
)
Depreciation and amortization
(2,866
)
 
(3,031
)
 
(9,074
)
 
(7,027
)
Total expenses
(190,167
)
 
(147,090
)
 
(570,203
)
 
(563,216
)
Adjusted net income before interest and other income (expense)
174,841

 
35,651

 
440,562

 
290,667

Interest expense, net of interest income
(7,799
)
 
(8,388
)
 
(24,458
)
 
(26,103
)
Other income (expense), net
(4,902
)
 
(283
)
 
(6,294
)
 
(2,279
)
Adjusted net income
162,140

 
26,980

 
409,810

 
262,285

Adjusted net income attributable to OCGH non-controlling interest
(96,471
)
 
(18,491
)
 
(244,272
)
 
(182,862
)
Non-Operating Group expenses
(182
)
 
(464
)
 
(647
)
 
(1,424
)
Adjusted net income-OCG before income taxes
65,487

 
8,025

 
164,891

 
77,999

Income taxes-OCG
(7,579
)
 
(831
)
 
(27,141
)
 
(12,660
)
Adjusted net income-OCG
$
57,908

 
$
7,194

 
$
137,750

 
$
65,339

Adjusted net income per Class A unit
$
0.92

 
$
0.15

 
$
2.21

 
$
1.38

Weighted average number of Class A units outstanding
62,755

 
48,440

 
62,424

 
47,304

 
 
 
 
 
(1)
In the fourth quarter of 2015, the definition of ANI was modified to reflect differences with respect to (a) third-party placement costs associated with closed-end funds, which under GAAP are expensed as incurred, but for ANI are capitalized and amortized as general and administrative expense in proportion to the associated management fee stream, and (b) gains and losses resulting from foreign-currency transactions and hedging activities, which under GAAP are recognized as general and administrative expense whether realized or unrealized in the current period, whereas for ANI unrealized gains and losses from foreign-currency hedging activities are deferred until realized, at which time they are included in the same revenue or expense line item as the underlying exposure that was hedged. Additionally, for ANI, foreign-currency transaction gains and losses are included in other income (expense), net. Prior periods have not been recast for the change related to third-party placement costs, but have been recast to retroactively reflect the change related to foreign-currency hedging. Placement costs associated with closed-end funds amounted to $0.7 million and $4.4 million, respectively, for the three and nine months ended September 30, 2015, and remain expensed as incurred in those periods for both GAAP and ANI purposes.


77

Distributable Earnings
Distributable earnings and distributable earnings-OCG, as well as per unit data, are set forth below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per unit data)
Revenues:
 
 
 
 
 
 
 
Management fees
$
194,349

 
$
185,766

 
$
593,069

 
$
566,058

Incentive income
99,731

 
16,925

 
283,966

 
230,952

Receipts of investment income from funds (1) 
18,020

 
29,459

 
41,637

 
83,617

Receipts of investment income from companies
17,866

 
13,304

 
42,293

 
30,275

Total distributable earnings revenues
329,966

 
245,454

 
960,965

 
910,902

Expenses:
 
 
 
 
 
 
 
Compensation and benefits
(94,624
)
 
(97,348
)
 
(298,067
)
 
(310,996
)
Incentive income compensation
(47,378
)
 
(7,596
)
 
(132,534
)
 
(127,252
)
General and administrative
(29,258
)
 
(30,279
)
 
(91,339
)
 
(90,181
)
Depreciation and amortization
(2,866
)
 
(3,031
)
 
(9,074
)
 
(7,027
)
Total expenses
(174,126
)
 
(138,254
)
 
(531,014
)
 
(535,456
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net of interest income
(7,799
)
 
(8,388
)
 
(24,458
)
 
(26,103
)
Operating Group income taxes
(1,662
)
 
(1,550
)
 
(4,491
)
 
(3,749
)
Other income (expense), net
(4,902
)
 
(283
)
 
(6,294
)
 
(2,279
)
Distributable earnings
141,477

 
96,979

 
394,708

 
343,315

Distributable earnings attributable to OCGH non-controlling interest
(84,177
)
 
(66,464
)
 
(235,323
)
 
(238,096
)
Non-Operating Group expenses
(182
)
 
(464
)
 
(647
)
 
(1,424
)
Distributable earnings-OCG income taxes
(789
)
 
507

 
(5,472
)
 
(579
)
Tax receivable agreement
(5,106
)
 
(4,880
)
 
(15,318
)
 
(14,170
)
Distributable earnings-OCG
$
51,223

 
$
25,678

 
$
137,948

 
$
89,046

Distributable earnings per Class A unit
$
0.82

 
$
0.53

 
$
2.21

 
$
1.88

Weighted average number of Class A units outstanding
62,755

 
48,440

 
62,424

 
47,304

 
 
 
 
 
(1)
This adjustment characterizes a portion of the distributions received from funds as receipts of investment income or loss. In general, the income or loss component of a fund distribution is calculated by multiplying the amount of the distribution by the ratio of our investment’s undistributed income or loss to our remaining investment balance. In addition, if the distribution is made during the investment period, it is generally not reflected in distributable earnings until after the investment period ends. Additionally, any impairment charges on our CLO investments included in ANI are, for distributable earnings purposes, amortized over the remaining investment period of the respective CLO to align with the timing of expected cash flows.
Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Distributable earnings grew $44.5 million, or 45.9%, to $141.5 million for the three months ended September 30, 2016, from $97.0 million for the three months ended September 30, 2015, reflecting increases of $43.0 million in incentive income, net of incentive income compensation expense (“net incentive income”) and $12.5 million in fee-related earnings, partially offset by a $6.9 million decline in investment income proceeds. For the three months ended September 30, 2016, investment income proceeds totaled $35.9 million, including $18.0 million from fund distributions and $17.9 million from DoubleLine, as compared with total investment income proceeds in the prior-year period of $42.8 million, of which $29.5 million and $13.3 million was attributable to fund distributions and DoubleLine, respectively.

78

Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Distributable earnings grew $51.4 million, or 15.0%, to $394.7 million for the nine months ended September 30, 2016, from $343.3 million for the nine months ended September 30, 2015, reflecting increases of $47.7 million in net incentive income and $36.7 million in fee-related earnings, partially offset by a $30.0 million decline in investment income proceeds. For the nine months ended September 30, 2016, investment income proceeds totaled $83.9 million, including $41.6 million from fund distributions and $42.3 million from DoubleLine, as compared with total investment income proceeds in the prior-year period of $113.9 million, of which $83.6 million and $33.9 million was attributable to fund distributions and DoubleLine, respectively.
The following table reconciles distributable earnings and ANI to net income attributable to Oaktree Capital Group, LLC:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Distributable earnings
$
141,477

 
$
96,979

 
$
394,708

 
$
343,315

Investment income (loss) (1) 
70,928

 
(19,950
)
 
133,730

 
56,873

Receipts of investment income from funds (2) 
(18,020
)
 
(29,459
)
 
(41,637
)
 
(83,617
)
Receipts of investment income from companies
(17,866
)
 
(13,304
)
 
(42,293
)
 
(30,275
)
Equity-based compensation (3) 
(16,041
)
 
(8,836
)
 
(39,189
)
 
(27,760
)
Operating Group income taxes
1,662

 
1,550

 
4,491

 
3,749

Adjusted net income
162,140

 
26,980

 
409,810

 
262,285

Incentive income (4) 
7

 
(8,676
)
 
(39,881
)
 
(20,249
)
Incentive income compensation (4) 
(7
)
 
2,689

 
39,881

 
20,242

Investment income (5) 
6,155

 
—

 
19,733

 
—

Equity-based compensation (6) 
(3,798
)
 
(3,658
)
 
(9,271
)
 
(12,523
)
Placement costs (7)  
(893
)
 
—

 
(8,807
)
 
—

Foreign-currency hedging (8) 
(1,306
)
 
(6,338
)
 
(10,837
)
 
(959
)
Acquisition-related items (9) 
253

 
(1,433
)
 
1,751

 
(4,935
)
Income taxes (10) 
(8,567
)
 
(1,893
)
 
(29,818
)
 
(15,253
)
Non-Operating Group expenses (11) 
(182
)
 
(464
)
 
(647
)
 
(1,424
)
Non-controlling interests (11) 
(95,505
)
 
(5,320
)
 
(236,492
)
 
(167,230
)
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

 
 
 
 
 
(1)
This adjustment adds back segment investment income, which with respect to investments in funds is initially largely non-cash in nature and is thus not available to fund our operations or make equity distributions.
(2)
This adjustment eliminates the portion of distributions received from funds characterized as receipts of investment income or loss. In general, the income or loss component of a distribution from a fund is calculated by multiplying the amount of the distribution by the ratio of our investment’s undistributed income or loss to our remaining investment balance. In addition, if the distribution is made during the investment period, it is generally not reflected in distributable earnings until after the investment period ends.
(3)
This adjustment adds back the effect of equity-based compensation expense related to unit grants made after our initial public offering, which is excluded from distributable earnings because it is non-cash in nature and does not impact our ability to fund our operations or make equity distributions.
(4)
This adjustment adds back the effect of timing differences associated with the recognition of incentive income and incentive income compensation expense between adjusted net income and net income attributable to OCG.
(5)
This adjustment adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting are accounted for at amortized cost, subject to impairment between adjusted net income and net income attributable to OCG.
(6)
This adjustment adds back the effect of (a) equity-based compensation expense related to unit grants made before our initial public offering, which is excluded from adjusted net income because it does not affect our financial position and from distributable earnings because it is non-cash in nature and does not impact our ability to fund operations or make equity distributions, and (b) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting.
(7)
This adjustment adds back the effect of timing differences with respect to the recognition of third-party placement costs associated with closed-end funds between adjusted net income and net income attributable to OCG.

79

(8)
This adjustment adds back the effect of timing differences associated with the recognition of unrealized gains and losses related to foreign-currency hedging between adjusted net income and net income attributable to OCG.
(9)
This adjustment adds back the effect of acquisition-related items associated with the amortization of intangibles and changes in the contingent consideration liability.
(10)
Because adjusted net income and distributable earnings are pre-tax measures, this adjustment adds back the effect of income tax expense.
(11)
Because adjusted net income and distributable earnings are calculated at the Operating Group level, this adjustment adds back the effect of items applicable to OCG, its Intermediate Holding Companies or non-controlling interests.

The following table reconciles distributable earnings-OCG and adjusted net income-OCG to net income attributable to Oaktree Capital Group, LLC: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Distributable earnings-OCG (1) 
$
51,223

 
$
25,678

 
$
137,948

 
$
89,046

Investment income (loss) attributable to OCG
28,726

 
(6,277
)
 
54,067

 
16,790

Receipts of investment income from funds attributable to OCG
(7,298
)
 
(9,270
)
 
(16,817
)
 
(25,811
)
Receipts of investment income from companies attributable to OCG
(7,236
)
 
(4,186
)
 
(17,081
)
 
(9,343
)
Equity-based compensation attributable to OCG (2) 
(6,497
)
 
(2,781
)
 
(15,830
)
 
(8,588
)
Distributable earnings-OCG income taxes
789

 
(507
)
 
5,472

 
579

Tax receivable agreement
5,106

 
4,880

 
15,318

 
14,170

Income taxes of Intermediate Holding Companies
(6,905
)
 
(343
)
 
(25,327
)
 
(11,504
)
Adjusted net income-OCG (1) 
57,908

 
7,194

 
137,750

 
65,339

Incentive income attributable to OCG (3) 
3

 
(2,730
)
 
(16,048
)
 
(6,015
)
Incentive income compensation attributable to OCG (3) 
(3
)
 
846

 
16,048

 
5,893

Investment income attributable to OCG (4) 
2,493

 
—

 
7,961

 
—

Equity-based compensation attributable to OCG (5) 
(1,538
)
 
(1,151
)
 
(3,744
)
 
(3,843
)
Placement costs attributable to OCG (6) 
(362
)
 
—

 
(3,548
)
 
—

Foreign-currency hedging attributable to OCG (7) 
(529
)
 
(1,994
)
 
(4,369
)
 
(411
)
Acquisition-related items attributable to OCG (8) 
103

 
(451
)
 
708

 
(1,515
)
Non-controlling interests attributable to OCG (8) 
222

 
173

 
664

 
506

Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

 
 
 
 
 
(1)
Distributable earnings-OCG and adjusted net income-OCG are calculated to evaluate the portion of adjusted net income and distributable earnings attributable to Class A unitholders. These measures are net of income taxes and expenses applicable to OCG or its Intermediate Holding Companies.
(2)
This adjustment adds back the effect of equity-based compensation expense attributable to OCG related to unit grants made after our initial public offering, which is excluded from distributable earnings because it is non-cash in nature and does not impact our ability to fund our operations or make equity distributions.
(3)
This adjustment adds back the effect of timing differences associated with the recognition of incentive income and incentive income compensation expense between adjusted net income-OCG and net income attributable to OCG.
(4)
This adjustment adds back the effect of differences in the recognition of investment income related to corporate investments in CLOs which under GAAP are marked-to-market but for segment reporting are accounted for at amortized cost, subject to impairment between adjusted net income-OCG and net income attributable to OCG.
(5)
This adjustment adds back the effect of (a) equity-based compensation expense attributable to OCG related to unit grants made before our initial public offering, which is excluded from adjusted net income because it does not affect our financial position and from distributable earnings because it is non-cash in nature and does not impact our ability to fund our operations or make equity distributions, and (b) differences arising from EVUs that are classified as liability awards under GAAP but as equity awards for segment reporting.
(6)
This adjustment adds back the effect of timing differences with respect to the recognition of third-party placement costs associated with closed-end funds between adjusted net income-OCG and net income attributable to OCG.
(7)
This adjustment adds back the effect of timing differences associated with the recognition of unrealized gains and losses related to foreign-currency hedging between adjusted net income-OCG and net income attributable to OCG.
(8)
This adjustment adds back the effect of (a) acquisition-related items associated with the amortization of intangibles and changes in the contingent consideration liability and (b) non-controlling interests.

80

Fee-related Earnings
Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Fee-related earnings grew $12.5 million, or 22.7%, to $67.6 million for the three months ended September 30, 2016, from $55.1 million for the three months ended September 30, 2015. The increase reflected $8.5 million of higher management fees, $2.7 million of lower compensation and benefits, and $1.0 million of lower general and administrative expense. The portion of fee-related earnings attributable to our Class A units was $0.38 and $0.36 per unit for the three months ended September 30, 2016 and 2015, respectively.
The effective tax rate applicable to fee-related earnings for the three months ended September 30, 2016 and 2015 was 12% and -3%, respectively, resulting from estimated full-year effective rates of 8% and 1%, respectively.  The rate used for interim fiscal periods is based on the estimated full-year effective tax rate, which is subject to change as the year progresses. In general, the annual effective tax rate increases as annual fee-related earnings increase, and vice versa.
Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Fee-related earnings grew $36.7 million, or 23.2%, to $194.6 million for the nine months ended September 30, 2016, from $157.9 million for the nine months ended September 30, 2015. The increase reflected $27.0 million of higher management fees, $12.9 million of lower compensation and benefits, and $1.1 million of higher general and administrative expense. The portion of fee-related earnings attributable to our Class A units was $1.13 and $0.98 per unit for the nine months ended September 30, 2016 and 2015, respectively.
The effective tax rate applicable to fee-related earnings for the nine months ended September 30, 2016 and 2015 was 9% and 2%, respectively.
The following table reconciles fee-related earnings and ANI to net income attributable to Oaktree Capital Group, LLC:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Fee-related earnings (1)
$
67,601

 
$
55,108

 
$
194,589

 
$
157,854

Incentive income
99,731

 
16,925

 
283,966

 
230,952

Incentive income compensation
(47,378
)
 
(7,596
)
 
(132,534
)
 
(127,252
)
Investment income (loss)
70,928

 
(19,950
)
 
133,730

 
56,873

Equity-based compensation (2) 
(16,041
)
 
(8,836
)
 
(39,189
)
 
(27,760
)
Interest expense, net of interest income
(7,799
)
 
(8,388
)
 
(24,458
)
 
(26,103
)
Other income (expense), net
(4,902
)
 
(283
)
 
(6,294
)
 
(2,279
)
Adjusted net income
162,140

 
26,980

 
409,810

 
262,285

Reconciling adjustments (3) 
(103,843
)
 
(25,093
)
 
(274,388
)
 
(202,331
)
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

 
 
 
 
 
(1)
Fee-related earnings is a component of adjusted net income and is comprised of segment management fees less segment operating expenses other than incentive income compensation expense and non-cash equity-based compensation expense related to unit grants made after our initial public offering.
(2)
This adjustment adds back the effect of equity-based compensation expense related to unit grants made after our initial public offering, which is excluded from fee-related earnings because it is non-cash in nature and does not impact our ability to fund our operations or make equity distributions.
(3)
Please refer to the table on page 79 for a detailed reconciliation of adjusted net income to net income attributable to Oaktree Capital Group, LLC.

81

The following table reconciles fee-related earnings-OCG and adjusted net income-OCG to net income attributable to Oaktree Capital Group, LLC:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Fee-related earnings-OCG (1)
$
23,869

 
$
17,407

 
$
70,745

 
$
46,361

Incentive income attributable to OCG
40,393

 
5,325

 
114,656

 
69,510

Incentive income compensation attributable to OCG
(19,189
)
 
(2,391
)
 
(53,507
)
 
(38,180
)
Investment income (loss) attributable to OCG
28,726

 
(6,277
)
 
54,067

 
16,790

Equity-based compensation attributable to OCG (2) 
(6,497
)
 
(2,781
)
 
(15,830
)
 
(8,588
)
Interest expense, net of interest income attributable to OCG
(3,112
)
 
(2,611
)
 
(9,756
)
 
(7,972
)
Other income (expense) attributable to OCG
(1,985
)
 
(89
)
 
(2,547
)
 
(716
)
Non-fee-related earnings income taxes attributable to OCG (3)
(4,297
)
 
(1,389
)
 
(20,078
)
 
(11,866
)
Adjusted net income-OCG (1) 
57,908

 
7,194

 
137,750

 
65,339

Reconciling adjustments (4) 
389

 
(5,307
)
 
(2,328
)
 
(5,385
)
Net income attributable to Oaktree Capital Group, LLC
$
58,297

 
$
1,887

 
$
135,422

 
$
59,954

 
 
 
 
 
(1)
Fee-related earnings-OCG and adjusted net income-OCG are calculated to evaluate the portion of adjusted net income and fee-related earnings attributable to Class A unitholders. These measures are net of income taxes and other income or expenses applicable to OCG or its Intermediate Holding Companies. A reconciliation of fee-related earnings to fee-related earnings-OCG is presented below.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per unit data)
 
 
 
 
 
 
 
 
Fee-related earnings
$
67,601

 
$
55,108

 
$
194,589

 
$
157,854

Fee-related earnings attributable to OCGH non-controlling interest
(40,221
)
 
(37,768
)
 
(116,016
)
 
(109,221
)
Non-Operating Group expenses
(229
)
 
(491
)
 
(765
)
 
(1,478
)
Fee-related earnings-OCG income tax (expense) benefit
(3,282
)
 
558

 
(7,063
)
 
(794
)
Fee-related earnings-OCG
$
23,869

 
$
17,407

 
$
70,745

 
$
46,361

Fee-related earnings per Class A unit
$
0.38

 
$
0.36

 
$
1.13

 
$
0.98

Weighted average number of Class A units outstanding
62,755

 
48,440

 
62,424

 
47,304


(2)
This adjustment adds back the effect of equity-based compensation expense attributable to OCG related to unit grants made after our initial public offering, which is excluded from fee-related earnings-OCG because it is non-cash in nature and does not impact our ability to fund our operations or make equity distributions.
(3)
This adjustment adds back income taxes associated with segment incentive income, incentive income compensation expense or investment income or loss, which are not included in the calculation of fee-related earnings-OCG.
(4)
Please refer to the table on page 80 for a detailed reconciliation of adjusted net income-OCG to net income attributable to Oaktree Capital Group, LLC.

82

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Segment Revenues
Management Fees
A summary of management fees is set forth below:
 
Three Months Ended
September 30,
 
2016
 
2015
 
(in thousands)
Management Fees:
 

 
 

Closed-end funds
$
141,513

 
$
127,129

Open-end funds
39,828

 
44,241

Evergreen funds
13,008

 
14,396

Total
$
194,349

 
$
185,766

 
Management fees increased $8.5 million, or 4.6%, to $194.3 million for the three months ended September 30, 2016, from $185.8 million for the three months ended September 30, 2015, for the reasons described below.
•
Closed-end funds.    Management fees attributable to closed-end funds grew $14.4 million, or 11.3%, to $141.5 million for the three months ended September 30, 2016, from $127.1 million for the three months ended September 30, 2015. The growth reflected an aggregate increase of $30.0 million principally from the start of the investment periods for Oaktree Power Opportunities Fund IV (“Power Fund IV”), Oaktree Principal Fund VI (“PF VI”), Opps X and ROF VII. This increase was partially offset by an aggregate decline of $15.6 million primarily attributable to closed-end funds in liquidation.
•
Open-end funds.    Management fees attributable to open-end funds decreased $4.4 million, or 10.0%, to $39.8 million for the three months ended September 30, 2016, from $44.2 million for the three months ended September 30, 2015, reflecting net outflows among our open-end strategies.
•
Evergreen funds.    Management fees attributable to evergreen funds decreased $1.4 million, or 9.7%, to $13.0 million for the three months ended September 30, 2016, from $14.4 million for the three months ended September 30, 2015, primarily reflecting net outflows and a reduction in the average management fee rate for Value Opportunities (“VOF”). The period-end weighted average annual management fee rate for evergreen funds decreased to 1.22% as of September 30, 2016, from 1.46% as of September 30, 2015, primarily reflecting the reduction in the management fee rate for VOF.
Incentive Income
A summary of incentive income is set forth below:  
 
Three Months Ended
September 30,
 
2016
 
2015
 
(in thousands)
Incentive Income:
 
 
 
Closed-end funds
$
97,726

 
$
16,921

Evergreen funds
2,005

 
4

Total
$
99,731

 
$
16,925

Incentive income increased $82.8 million, to $99.7 million for the three months ended September 30, 2016, from $16.9 million for the three months ended September 30, 2015. The current-year period reflected incentive distributions from six funds across five investment strategies.

83

Investment Income (Loss)
A summary of investment income (loss) is set forth below:  
 
Three Months Ended
September 30,
 
2016
 
2015
Income (loss) from investments in funds:
(in thousands)
Oaktree funds:
 

 
 

Corporate Debt
$
15,932

 
$
(2,763
)
Convertible Securities
77

 
(1,257
)
Distressed Debt
15,295

 
(30,177
)
Control Investing
19,702

 
(1,156
)
Real Estate
3,791

 
3,339

Listed Equities
(2,802
)
 
(4,413
)
Non-Oaktree funds
1,166

 
3,316

Income from investments in companies
17,767

 
13,161

Total investment income (loss)
$
70,928

 
$
(19,950
)
Investment income (loss) increased $90.9 million, to income of $70.9 million for the three months ended September 30, 2016, from a loss of $20.0 million for the three months ended September 30, 2015. The increase largely reflected higher overall returns on our fund investments. DoubleLine accounted for investment income of $17.7 million and $13.2 million for the three months ended September 30, 2016 and 2015, respectively, of which performance fees accounted for $1.9 million and $1.3 million, respectively.
Segment Expenses
Compensation and Benefits
Compensation and benefits decreased $2.7 million, or 2.8%, to $94.6 million for the three months ended September 30, 2016, from $97.3 million for the three months ended September 30, 2015, reflecting an overall shift in compensation mix from cash to equity.
Equity-based Compensation
Equity-based compensation increased $7.2 million, or 81.8%, to $16.0 million for the three months ended September 30, 2016, from $8.8 million for the three months ended September 30, 2015. The increase reflected non-cash amortization expense associated with vesting of Class A and OCGH unit grants made to employees and directors subsequent to our 2012 initial public offering. Additionally, the current-year period included $3.5 million of expense resulting from the accelerated vesting of Class A and OCGH units related to employee departures.
Incentive Income Compensation
Incentive income compensation expense increased $39.8 million, to $47.4 million for the three months ended September 30, 2016, from $7.6 million for the three months ended September 30, 2015, primarily reflecting growth in incentive income.
General and Administrative
General and administrative expense decreased $1.0 million, or 3.3%, to $29.3 million for the three months ended September 30, 2016, from $30.3 million for the three months ended September 30, 2015, reflecting various items.
Interest Expense, Net of Interest Income
Interest expense, net decreased $0.6 million, or 7.1%, to $7.8 million for the three months ended September 30, 2016, from $8.4 million for the three months ended September 30, 2015, primarily reflecting lower interest expense resulting from the June 2016 maturity of our $50.0 million 6.09% senior notes.

84

Other Income (Expense), Net
Other income (expense), net was an expense of $4.9 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively. The current-year period included a $4.4 million impairment charge on our corporate plane.
Adjusted Net Income
ANI increased $135.1 million, to $162.1 million for the three months ended September 30, 2016, from $27.0 million for the three months ended September 30, 2015, reflecting increases of $90.9 million in investment income, $43.0 million in net incentive income and $12.5 million in fee-related earnings.
Income Taxes-OCG
Income taxes increased $6.8 million, to $7.6 million for the three months ended September 30, 2016, from $0.8 million for the three months ended September 30, 2015.  The increase reflected higher adjusted net income-OCG before income taxes, as well as a higher effective tax rate for the three months ended September 30, 2016. The effective tax rates applied to ANI for the three months ended September 30, 2016 and 2015 were 12% and 10%, respectively, resulting from estimated full-year effective rates of 17% and 16%, respectively.  The rate used for interim fiscal periods is based on an estimated full-year effective tax rate on income that can be reliably forecasted, combined with tax expense in the current period on incentive income and any other income that cannot be reliably estimated. We expect variability in tax rates between quarters and full years, because the effective tax rate is a function of the mix of income and other factors, each of which can have a material impact on the particular period’s income tax expense and often vary significantly within or between years. In general, the annual effective tax rate increases as the proportion of ANI arising from fee-related earnings, DoubleLine-related investment income, and certain incentive and investment income rises, and vice versa.
Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Segment Revenues
Management Fees
A summary of management fees is set forth below:
 
Nine Months Ended
September 30,
 
2016
 
2015
 
(in thousands)
Management Fees:
 

 
 

Closed-end funds
$
435,717

 
$
387,923

Open-end funds
117,017

 
135,259

Evergreen funds
40,335

 
42,876

Total
$
593,069

 
$
566,058

 
Management fees increased $27.0 million, or 4.8%, to $593.1 million for the nine months ended September 30, 2016, from $566.1 million for the nine months ended September 30, 2015, for the reasons described below.
•
Closed-end funds.    Management fees attributable to closed-end funds grew $47.8 million, or 12.3%, to $435.7 million for the nine months ended September 30, 2016, from $387.9 million for the nine months ended September 30, 2015. The growth reflected an aggregate increase of $90.5 million principally from the start of the investment periods for Power Fund IV, PF VI, Opps X and ROF VII. The increase was partially offset by an aggregate decline of $42.7 million, primarily attributable to closed-end funds in liquidation.
•
Open-end funds.    Management fees attributable to open-end funds decreased $18.3 million, or 13.5%, to $117.0 million for the nine months ended September 30, 2016, from $135.3 million for the nine months ended September 30, 2015, reflecting net outflows and market-value declines among our open-end strategies.

85

•
Evergreen funds.    Management fees attributable to evergreen funds decreased $2.6 million, or 6.1%, to $40.3 million for the nine months ended September 30, 2016, from $42.9 million for the nine months ended September 30, 2015, primarily reflecting net outflows, a market-value decline and a reduction in the average management fee rate for VOF. The decrease was partially offset by drawdowns of capital commitments by Strategic Credit. The period-end weighted average annual management fee rate for evergreen funds decreased to 1.22% as of September 30, 2016, from 1.46% as of September 30, 2015, primarily reflecting the reduction in the management fee rate for VOF.
Incentive Income
A summary of incentive income is set forth below:  
 
Nine Months Ended
September 30,
 
2016
 
2015
 
(in thousands)
Incentive Income:
 
 
 
Closed-end funds
$
281,864

 
$
230,948

Evergreen funds
2,102

 
4

Total
$
283,966

 
$
230,952

Incentive income increased $53.0 million, or 22.9%, to $284.0 million for the nine months ended September 30, 2016, from $231.0 million for the nine months ended September 30, 2015. The current-year period included tax-related incentive distributions of $72.7 million and other incentive distributions of $211.3 million, respectively, as compared with $142.9 million and $88.1 million for the comparable prior-year periods.
Investment Income
A summary of investment income is set forth below:  
 
Nine Months Ended
September 30,
 
2016
 
2015
Income (loss) from investments in funds:
(in thousands)
Oaktree funds:
 

 
 

Corporate Debt
$
15,026

 
$
13,250

Convertible Securities
(819
)
 
(246
)
Distressed Debt
34,462

 
(34,889
)
Control Investing
19,535

 
18,127

Real Estate
8,353

 
12,362

Listed Equities
2,956

 
4,737

Non-Oaktree funds
4,661

 
8,049

Income from investments in companies
49,556

 
35,483

Total investment income
$
133,730

 
$
56,873

Investment income increased $76.8 million, to $133.7 million for the nine months ended September 30, 2016, from $56.9 million for the nine months ended September 30, 2015. The increase reflected higher overall returns on our fund investments, partially offset by a $23 million impairment charge in the first quarter of 2016 on our investments in certain of our CLOs, predominantly stemming from holdings in energy-related companies. DoubleLine accounted for investment income of $49.3 million and $40.4 million in the nine months ended September 30, 2016 and 2015, respectively, of which performance fees accounted for $3.9 million in each period.
Segment Expenses
Compensation and Benefits
Compensation and benefits decreased $12.9 million, or 4.1%, to $298.1 million for the nine months ended September 30, 2016, from $311.0 million for the nine months ended September 30, 2015, primarily reflecting an overall shift in compensation mix from cash to equity.

86

Equity-based Compensation
Equity-based compensation increased $11.4 million, or 41.0%, to $39.2 million for the nine months ended September 30, 2016, from $27.8 million for the nine months ended September 30, 2015. The increase reflected non-cash amortization expense associated with vesting of Class A and OCGH unit grants made to employees and directors subsequent to our 2012 initial public offering. Additionally, the current-year period included incremental expense resulting from the accelerated vesting of Class A and OCGH units related to employee departures.
Incentive Income Compensation
Incentive income compensation expense increased $5.2 million, or 4.1%, to $132.5 million for the nine months ended September 30, 2016, from $127.3 million for the nine months ended September 30, 2015. The percentage increase was smaller than the corresponding increase of 22.9% in incentive income, as a result of catch-up tax distributions in the prior-year period related to incentive interests awarded to certain investment professionals, as well as differences in the applicable funds’ compensation percentages.
General and Administrative
General and administrative expense increased $1.1 million, or 1.2%, to $91.3 million for the nine months ended September 30, 2016, from $90.2 million for the nine months ended September 30, 2015, primarily reflecting higher legal, technology, marketing and staff augmentation costs, largely offset by lower expense for placement costs associated with closed-end funds and other professional fees.
Depreciation and Amortization
Depreciation and amortization expense increased $2.1 million, or 30.0%, to $9.1 million for the nine months ended September 30, 2016, from $7.0 million for the nine months ended September 30, 2015, primarily reflecting amortization of leasehold improvements associated with office space expansion.
Interest Expense, Net of Interest Income
Interest expense, net decreased $1.6 million, or 6.1%, to $24.5 million for the nine months ended September 30, 2016, from $26.1 million for the nine months ended September 30, 2015, reflecting higher interest income, as well as lower interest expense resulting from the June 2016 maturity of our $50.0 million 6.09% senior notes.
Other Income (Expense), Net
Other income (expense), net was an expense of $6.3 million and $2.3 million for the nine months ended September 30, 2016 and 2015, respectively. The current-year period included a $4.4 million impairment charge on our corporate plane and net foreign-currency transaction losses of $1.9 million. The prior-year period included a $3.6 million loss associated with certain non-operating corporate activities and net foreign-currency transaction gains of $1.3 million.
Adjusted Net Income
ANI increased $147.5 million, or 56.2%, to $409.8 million for the nine months ended September 30, 2016, from $262.3 million for the nine months ended September 30, 2015, reflecting increases of $76.8 million in investment income, $47.7 million in net incentive income and $36.7 million in fee-related earnings.
Income Taxes-OCG
Income taxes increased $14.4 million, to $27.1 million for the nine months ended September 30, 2016, from $12.7 million for the nine months ended September 30, 2015, reflecting higher adjusted net income-OCG before income taxes. The effective tax rate applied to ANI for both the nine months ended September 30, 2016 and 2015 was 16%.  The rate used for interim fiscal periods is based on an estimated full-year effective tax rate on income that can be reliably forecasted, combined with tax expense in the current period on incentive income and any other income that cannot be reliably estimated. We expect variability in tax rates between quarters and full years, because the effective tax rate is a function of the mix of income and other factors, each of which can have a material impact on the particular period’s income tax expense and often vary significantly within or between years. In general, the annual effective tax rate increases as the proportion of ANI arising from fee-related earnings, DoubleLine-related investment income, and certain incentive and investment income rises, and vice versa.

87

Segment Statements of Financial Condition
Since our founding, we have managed our financial condition in a way that builds our capital base and maintains sufficient liquidity for known and anticipated uses of cash. We have issued debt largely to help fund our corporate investments in funds and companies, favoring longer terms to better match the multi-year nature of our typical investments. Our segment assets do not include accrued incentives (fund level), an off-balance sheet metric, nor do they reflect the fair-market value of our 20% interest in DoubleLine, which is carried at cost, as adjusted under the equity method of accounting. For a reconciliation of segment total assets to our consolidated total assets, please see the “Segment Reporting” note to our condensed consolidated financial statements included elsewhere in this quarterly report.  
The following table presents our segment statements of financial condition:
 
As of
 
September 30,
2016
 
June 30,
2016
 
September 30,
2015
Assets:
(in thousands)
Cash and cash-equivalents
$
461,389

 
$
403,417

 
$
417,168

U.S. Treasury and time deposit securities
676,226

 
684,224

 
656,120

Corporate investments
1,383,612

 
1,371,978

 
1,465,195

Deferred tax assets
426,138

 
426,119

 
430,797

Receivables and other assets
355,546

 
274,635

 
259,841

Total assets
$
3,302,911

 
$
3,160,373

 
$
3,229,121

Liabilities and Capital:
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accounts payable and accrued expenses
$
337,594

 
$
262,392

 
$
314,757

Due to affiliates
360,193

 
358,716

 
370,949

Debt obligations
795,678

 
795,958

 
846,161

Total liabilities
1,493,465

 
1,417,066

 
1,531,867

Capital:
 
 
 
 
 
OCGH non-controlling interest in consolidated subsidiaries
1,017,711

 
982,684

 
1,097,164

Unitholders’ capital attributable to Oaktree Capital Group, LLC
791,735

 
760,623

 
600,090

Total capital
1,809,446

 
1,743,307

 
1,697,254

Total liabilities and capital
$
3,302,911

 
$
3,160,373

 
$
3,229,121

Corporate Investments
A summary of corporate investments is set forth below:
 
As of
 
September 30,
2016
 
June 30,
2016
 
September 30,
2015
Investments in funds:
(in thousands)
Oaktree funds:
 

 
 

 
 
Corporate Debt
$
421,466

 
$
417,883

 
$
446,151

Convertible Securities
1,704

 
1,627

 
18,452

Distressed Debt
396,173

 
380,324

 
388,459

Control Investing
263,882

 
251,612

 
255,798

Real Estate
117,822

 
113,406

 
148,853

Listed Equities
92,962

 
116,954

 
123,152

Non-Oaktree funds
69,651

 
70,551

 
69,146

Investments in companies
19,952

 
19,621

 
15,184

Total corporate investments
$
1,383,612

 
$
1,371,978

 
$
1,465,195


88

Liquidity and Capital Resources
We manage our liquidity and capital requirements by focusing on our cash flows before the consolidation of our funds and the effect of normal changes in short-term assets and liabilities. Our primary cash flow activities on an unconsolidated basis involve (a) generating cash flow from operations, (b) generating income from investment activities, including strategic investments in certain third parties, (c) funding capital commitments that we have made to our funds, (d) funding our growth initiatives, (e) distributing cash flow to our owners and (f) borrowings, interest payments and repayments under credit agreements, our senior notes and other borrowing arrangements. As of September 30, 2016, we had $1.1 billion of cash and U.S. Treasury and time deposit securities, and $796 million in outstanding debt, net of debt issuance costs. Additionally, we have a $500 million revolving credit facility available to us, which was undrawn as of September 30, 2016 and the date of this report. Oaktree’s investments in funds and companies had a carrying value of $1.4 billion as of September 30, 2016.
Ongoing sources of cash include (a) management fees, which are collected monthly or quarterly, (b) incentive income, which is volatile and largely unpredictable as to amount and timing, and (c) distributions stemming from our corporate investments in funds and companies. As of September 30, 2016, corporate investments of $1.4 billion included unrealized investment income proceeds of $298 million, of which $140 million was in closed-end funds in their liquidation period. We primarily use cash flow from operations and distributions from our corporate investments to pay compensation and related expenses, general and administrative expenses, income taxes, debt service, capital expenditures and distributions. This same cash flow, together with proceeds from equity and debt issuances, is also used to fund corporate investments, fixed assets and other capital items. If cash flow from operations was insufficient to fund distributions, we expect that we would suspend paying such distributions.
We use distributable earnings, which is derived from our segment results, to assess performance and assist in the determination of equity distributions from the Operating Group. Our quarterly distributable earnings may be affected by potential seasonal factors that may, in turn, affect the level of the cash distributions applicable to a particular quarter. For example, we generally receive tax-related incentive distributions from certain closed-end funds in the first quarter of the year, which if received generate distributable earnings in that period. Additionally, DoubleLine’s corporate distributions to us may vary in length of period covered.  For example, the quarterly distributions made in the second and fourth quarters typically have covered two and four months of activity, respectively. The distribution amount for any given period is likely to vary materially due to these and other factors.
Tax distributions are not required in respect of the Class A units and are only required from the Oaktree Operating Group entities if and to the extent there is sufficient cash available for distribution. Accordingly, if there were insufficient cash flow from operations to fund quarterly or tax distributions by the Oaktree Operating Group entities, we expect that these distributions would not be made. We believe that we have sufficient access to cash from existing balances, our operations and the revolving credit facility described below to fund our operations and commitments.
Consolidated Cash Flows
The accompanying condensed consolidated statements of cash flows include our consolidated funds, despite the fact that we typically have only a minority economic interest in those funds. The assets of consolidated funds, on a gross basis, are larger than the assets of our business and, accordingly, have a substantial effect on the cash flows reflected in our condensed consolidated statements of cash flows. The primary cash flow activities of our consolidated funds involve:
•
raising capital from third-party investors;
•
using the capital provided by us and third-party investors to fund investments and operating expenses;
•
financing certain investments with indebtedness;
•
generating cash flows through the realization of investments, as well as the collection of interest and dividend income; and
•
distributing net cash flows to fund investors and to us.
Because our consolidated funds are either treated as investment companies for accounting purposes or represent CLOs whose primary operations are investing activities, their investing cash flow amounts are included in our cash flows from operations. We believe that each of the consolidated funds and Oaktree has sufficient access to cash to fund their respective operations in the near term.

89

Significant amounts from our condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 are discussed below.
Operating Activities
Net cash used in operating activities was $204.3 million and $2.2 billion in the first nine months of 2016 and 2015, respectively. These amounts included, for the first nine months of 2016 and 2015, respectively: (a) net purchases of securities of the consolidated funds of $792.0 million and $2.5 billion; (b) net realized gains on investments of the consolidated funds of $8.6 million and $1.7 billion; and (c) changes in unrealized depreciation on investments of the consolidated funds of $15.7 million and $3.3 billion.
Investing Activities
Investing activities provided $41.5 million and used $17.4 million of cash in the first nine months of 2016 and 2015, respectively. Net activity from purchases, maturities and sales of U.S. Treasury and time deposit securities included net purchases of $15.1 million and $0.6 million for the first nine months of 2016 and 2015, respectively. Corporate investments in funds and companies of $50.8 million and $41.3 million for the first nine months of 2016 and 2015, respectively, consisted of the following:
 
Nine Months Ended
September 30,


2016
 
2015
 
(in thousands)
Funds
$
147,927

 
$
237,111

Eliminated in consolidation
(97,120
)
 
(195,822
)
Total investments
$
50,807

 
$
41,289


Distributions and proceeds from corporate investments in funds and companies of $175.0 million and $45.6 million for the first nine months of 2016 and 2015, respectively, consisted of the following:
 
Nine Months Ended
September 30,
 
2016
 
2015
 
(in thousands)
Funds
$
246,153

 
$
260,190

Eliminated in consolidation
(71,145
)
 
(238,633
)
Unconsolidated companies
—

 
24,013

Total proceeds
$
175,008

 
$
45,570


Purchases of fixed assets were $67.6 million and $21.1 million for the first nine months of 2016 and 2015, respectively, with the former including a deposit on a new corporate plane.
Financing Activities
Financing activities provided $312.3 million and $2.1 billion of cash in the first nine months of 2016 and 2015, respectively. For the first nine months of 2016 and 2015, respectively, financing activities included: (a) net contributions from non-controlling interests in consolidated funds of $62.6 million and $59.7 million; (b) net borrowings on credit facilities of the consolidated funds of $181.5 million and $1.5 billion; (c) distributions to unitholders of $282.0 million and $299.5 million; (d) proceeds from debt obligations issued by our CLOs of $426.3 million and $882.6 million; (e) payments for debt issuance costs of $9.3 million and $17.2 million; and (f) net unit purchases of $11.5 million and $4.5 million. Additionally, the first nine months of 2016 included a $50.0 million payment for the maturing principal balance of our 6.09% senior notes and $100.0 million in net proceeds from the issuance of our 3.69% senior notes, which was used to repay $100.0 million of our $250.0 million corporate term loan due March 31, 2021.

90

Future Sources and Uses of Liquidity
We expect to continue to make distributions to our Class A unitholders pursuant to our distribution policy. In the future, we may also issue additional units or debt and other equity securities with the objective of increasing our available capital. In addition, we may, from time to time, repurchase our Class A units in open market or privately negotiated purchases or otherwise, redeem our Class A units pursuant to the terms of our operating agreement, or repurchase OCGH units.
In addition to our ongoing sources of cash that include management fees, incentive income and fund distributions related to our corporate investments in funds and companies, we also have access to liquidity through our debt financings and credit agreements. We believe that the sources of liquidity described below will be sufficient to fund our working capital requirements for at least the next twelve months.
In July 2016, our indirect subsidiary, Oaktree Capital Management, L.P. (the “Issuer”), issued and sold to certain accredited investors $100 million of 3.69% senior notes (the “2016 Notes”) due July 12, 2031. The Notes are senior unsecured obligations of the Issuer, jointly and severally guaranteed by our indirect subsidiaries, Oaktree Capital I, L.P., Oaktree Capital II, L.P. and Oaktree AIF Investments, L.P. (together with the Issuer, the “Obligors”) pursuant to a note and guaranty agreement (the “2016 Note Agreement”). We used the proceeds from the sale of the 2016 Notes to simultaneously repay $100 million of our $250 million term loan due March 31, 2021.
The 2016 Note Agreement provides for certain affirmative and negative covenants, including financial covenants relating to the Obligors’ combined leverage ratio and minimum assets under management. In addition, the 2016 Note Agreement contains customary representations and warranties of the Obligors and customary events of default, in certain cases, subject to cure periods. The Issuer may prepay all, or from time to time any part of, the 2016 Notes at any time, subject to the Issuer’s payment of the applicable make-whole amount determined with respect to such principal amount prepaid. Upon the occurrence of a change of control, the Issuer will be required to make an offer to prepay the Notes together with the applicable make-whole amount determined with respect to such principal amount prepaid.
In March 2016, Oaktree Capital Management, L.P., Oaktree Capital II, L.P., Oaktree AIF Investments, L.P., and Oaktree Capital I, L.P. (collectively, the “Borrowers”) entered into the Second Amendment to Credit Agreement (the “Second Amendment”), which amended the credit agreement dated as of March 31, 2014 (as amended through and including the Second Amendment, the “Credit Agreement”). The Credit Agreement consists of a $250 million fully-funded term loan (the “Term Loan”), of which $100 million was repaid in July 2016, and a $500 million revolving credit facility (the “Revolver”). The Second Amendment extended the maturity date of the Credit Agreement from March 31, 2019 to March 31, 2021, at which time the entire remaining principal balance of $150 million is due, and provides the Borrowers with the option to extend the new maturity date by one year if the lenders holding at least 50% of the aggregate amount of the term loan and the revolving loan commitment thereunder on the date of the Borrowers’ extension request consent to such extension. Borrowings under the Credit Agreement generally bear interest at a spread to either LIBOR or an alternative base rate. Based on the current credit ratings of Oaktree Capital Management, L.P., the interest rate on borrowings is LIBOR plus 1.00% per annum and the commitment fee on the unused portions of the Revolver is 0.125% per annum. Utilizing an interest-rate swap, the Term Loan’s annual interest rate is fixed at 2.22% through January 2017, based on such current credit ratings. The Credit Agreement contains customary financial covenants and restrictions, including ones regarding a maximum leverage ratio of 3.0-to-1.0 and a minimum required level of assets under management (as defined in the credit agreement). The Second Amendment increased the minimum level of assets under management to $60 billion and made certain other amendments to the provisions of the Credit Agreement. As of September 30, 2016, we had no outstanding borrowings under our $500 million revolving credit facility and were able to draw the full amount available without violating any financial maintenance covenants.
In September 2014, the Obligors issued and sold to certain accredited investors $50 million aggregate principal amount of our 3.91% Senior Notes, Series A, due September 3, 2024 (the “Series A Notes”), $100 million aggregate principal amount of our 4.01% Senior Notes, Series B, due September 3, 2026 (the “Series B Notes”) and $100 million aggregate principal amount of our 4.21% Senior Notes, Series C, due September 3, 2029 (the “Series C Notes” and together with the Series A Notes and the Series B Notes, the “2014 Notes”) pursuant to a note and guarantee agreement (the “2014 Note Agreement”). The 2014 Notes are senior unsecured obligations of the Issuer, guaranteed by the other Obligors on a joint and several basis. Interest on the 2014 Notes is payable semi-annually.

91

The 2014 Note Agreement provides for certain affirmative and negative covenants, including financial covenants relating to the Obligors’ combined leverage ratio and minimum assets under management. In addition, the 2014 Note Agreement contains customary representations and warranties of the Obligors and customary events of default, in certain cases, subject to cure periods. The Issuer may prepay all, or from time to time any part of, the 2014 Notes at any time, subject to the Issuer’s payment of the applicable make-whole amount determined with respect to such principal amount prepaid. Upon the occurrence of a change of control, the Issuer will be required to make an offer to prepay the 2014 Notes together with the applicable make-whole amount determined with respect to such principal amount prepaid.
In November 2009, our subsidiary Oaktree Capital Management, L.P. issued $250 million in aggregate principal amount of senior notes due December 2, 2019 (the “2009 Notes”). The indenture governing the 2009 Notes contains customary financial covenants and restrictions that, among other things, limit the Obligors’ ability, subject to certain exceptions, to incur indebtedness secured by liens on voting stock or profit-participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The 2009 Notes do not contain financial maintenance covenants.
In addition to the 2009 Notes, as of September 30, 2016, we had one other series of senior notes outstanding, with an aggregate remaining principal balance of $50 million due in November 2016. These senior notes contain customary financial covenants and restrictions that, among other things, restrict our subsidiaries from incurring additional indebtedness and our subsidiaries and us from merging, consolidating, transferring, leasing or selling assets, incurring certain liens and making restricted payments, subject to certain exceptions. In addition, the agreements contain the following financial covenants: (a) a maximum consolidated leverage ratio covenant that requires us and our subsidiaries to maintain a ratio, calculated by dividing consolidated total debt (for us and our subsidiaries) by Consolidated EBITDA (as defined in each agreement) for the last four fiscal quarters, below 3.0-to-1.0, (b) a maximum interest coverage ratio covenant that requires us and our subsidiaries to maintain a ratio, calculated by dividing Consolidated EBITDA for the last four fiscal quarters by consolidated interest expense (for us and our subsidiaries), below 4.0-to-1.0, and (c) an assets under management covenant that requires us to maintain assets under management above $20 billion.
We are required to maintain minimum net capital balances for regulatory purposes in the U.S. and certain non-U.S. jurisdictions in which we do business, which are met in part by retaining cash and cash-equivalents in those jurisdictions. As a result, we may be restricted in our ability to transfer cash between different jurisdictions. As of September 30, 2016, we were required to maintain approximately $98.3 million in net capital at these subsidiaries and were in compliance with all regulatory minimum net capital requirements as of such date.
Oaktree Holdings, Inc. and Oaktree AIF Holdings, Inc. have entered into a tax receivable agreement with OCGH unitholders that, as amended, provides for the payment to an exchanging or selling OCGH unitholder of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes that they actually realize (or are deemed to realize in the case of an early termination payment by Oaktree Holdings, Inc. or Oaktree AIF Holdings, Inc., or a change of control) as a result of an increase in the tax basis of the assets owned by the Oaktree Operating Group. Assuming no material changes in the relevant tax law and that the Company earns sufficient taxable income to realize the full tax benefit of the increased amortization of the assets, as of September 30, 2016, future payments of this nature were estimated to aggregate $37.1 million over the period ending approximately in 2029 with respect to the 2007 Private Offering and $75.2 million over the period ending approximately in 2034 with respect to our initial public offering.
In May 2013, we issued and sold 8,050,000 Class A units in a public offering (the “May 2013 Offering”), resulting in $419.9 million in net proceeds to us. We did not retain any proceeds from the sale of Class A units in the May 2013 Offering, and we used the net proceeds from the May 2013 Offering to acquire interests in our business from certain Oaktree directors, employees and other investors, including certain senior executives and other members of our senior management. The exchange of OCGH units in connection with the May 2013 Offering resulted in increases in the tax basis of the tangible and intangible assets of the Oaktree Operating Group. As a result, we recorded a deferred tax asset of $134.4 million and an associated liability of $114.2 million for payments to OCGH unitholders under the tax receivable agreement, which together increased capital by $20.2 million. As of September 30, 2016, future payments with respect to the May 2013 Offering were estimated to aggregate $104.0 million over the period ending approximately in 2035.
In March 2014, we issued and sold 5,000,000 Class A units in a public offering (the “March 2014 Offering”), resulting in $296.7 million in proceeds to us. We did not retain any proceeds from the sale of Class A units in the March 2014 Offering. The proceeds from the March 2014 Offering were used to acquire interests in our business

92

from certain Oaktree directors, employees and other investors, including certain senior executives and other members of our senior management. The exchange of OCGH units in connection with the March 2014 Offering resulted in increases in the tax basis of the tangible and intangible assets of the Oaktree Operating Group. As a result, we recorded a deferred tax asset of $94.2 million and an associated liability of $80.0 million for payments to OCGH unitholders under the tax receivable agreement, which together increased capital by $14.1 million. As of September 30, 2016, future payments with respect to the March 2014 Offering were estimated to aggregate $78.1 million over the period ending approximately in 2036.
In March 2015, we issued and sold 4,600,000 Class A units in a public offering (the “March 2015 Offering”), resulting in $237.8 million in proceeds to us. We did not retain any proceeds from the sale of Class A units in the March 2015 Offering. The proceeds from the March 2015 Offering were used to acquire interests in our business from certain Oaktree directors, employees and other investors, including certain senior executives and other members of the Company’s senior management. The exchange of OCGH units in connection with the March 2015 Offering resulted in increases in the tax basis of the tangible and intangible assets of the Oaktree Operating Group. As a result, we recorded a deferred tax asset of $73.5 million and an associated liability of $62.5 million for payments to OCGH unitholders under the tax receivable agreement, which together increased capital by $11.0 million. As of September 30, 2016, future payments with respect to the March 2015 Offering were estimated to aggregate $62.5 million over the period ending approximately in 2037.
No amounts were paid under the tax receivable agreement during the nine months ended September 30, 2016.
Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, Oaktree and our consolidated funds enter into contractual arrangements that may require future cash payments. The following table sets forth information related to anticipated future cash payments as of September 30, 2016:  
 
Last Three Months of 2016
 
2017-2018
 
2019-2020
 
Thereafter
 
Total
 
(in thousands)
Oaktree and Operating Subsidiaries:
 
 
 
 
 
 
 
 
 
Operating lease obligations (1)
$
3,560

 
$
24,401

 
$
29,232

 
$
66,556

 
$
123,749

Debt obligations payable
50,000

 
—

 
250,000

 
500,000

 
800,000

Interest obligations on debt (2)
11,043

 
60,066

 
37,952

 
72,314

 
181,375

Tax receivable agreement
19,393

 
41,882

 
45,375

 
250,201

 
356,851

Contingent consideration (3) 
23,741

 
—

 
—

 
—

 
23,741

Commitments to Oaktree and third-party funds (4)
532,811

 
—

 
—

 
—

 
532,811

Subtotal
640,548

 
126,349

 
362,559

 
889,071

 
2,018,527

Consolidated Funds:
 

 
 

 
 

 
 

 
 

Debt obligations of CLOs
—

 
183,201

 
—

 
2,666,612

 
2,849,813

Interest on debt obligations of CLOs (2) 
16,833

 
134,619

 
131,199

 
421,811

 
704,462

Commitments to fund investments (5) 
2,602

 
—

 
—

 
—

 
2,602

Total
$
659,983

 
$
444,169

 
$
493,758

 
$
3,977,494

 
$
5,575,404

 
 
 
 
 
(1)
We lease our office space under agreements that expire periodically through 2030. The table includes only guaranteed minimum lease payments for these leases and does not project other lease-related payments. These leases are classified as operating leases for financial statement purposes and as such are not recorded as liabilities in our condensed consolidated financial statements.
(2)
Interest obligations include accrued interest on outstanding indebtedness. Where applicable, current interest rates are applied to estimate future interest obligations on variable-rate debt.
(3)
This represents the undiscounted contingent consideration obligation as of September 30, 2016 related to the 2014 Highstar acquisition, which is payable in a combination of cash and fully-vested OCGH units. The amount of the contingent consideration obligation is based on the achievement of certain performance targets over a period of up to seven years from the acquisition date. Due to uncertainty in the timing of payment, if any, the entire amount is presented in the 2016 column.

93

(4)
These obligations represent commitments by us to provide general partner capital funding to our funds and limited partner capital funding to funds managed by unaffiliated third parties. These amounts are generally due on demand and are therefore presented in the 2016 column. Capital commitments are expected to be called over a period of several years.
(5)
These obligations represent commitments by our funds to make investments or fund uncalled contingent commitments. These amounts are generally due either on demand or by various contractual dates that vary by investment and are therefore presented in the 2016 column. Capital commitments are expected to be called over a period of several years.
In some of our service contracts or management agreements, we have agreed to indemnify third-party service providers or separate account clients under certain circumstances. The terms of the indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined and has neither been included in the above table nor recorded in our condensed consolidated financial statements as of September 30, 2016.
As of September 30, 2016, none of the incentive income we had recognized was subject to clawback by the funds.  
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements. Please see note 15 for information on our commitments and contingencies.
Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe our critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. For a summary of our significant accounting policies, please see the notes to our condensed consolidated financial statements included elsewhere in this quarterly report and the notes to our consolidated financial statements in our annual report. For a summary of our critical accounting policies, please see “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Critical Accounting Policies” in our annual report.
The table below summarizes the investments and other financial instruments, net of debt obligations, by fund structure and fair-value hierarchy levels, held by our consolidated funds for each period presented in our condensed consolidated statements of financial condition (in thousands):
As of September 30, 2016
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
Closed-end funds
$
4,597

 
$
349,258

 
$
213,584

 
$
567,439

Open-end funds
89,042

 
60,096

 
—

 
149,138

Evergreen funds
60,964

 
(238
)
 
1,393

 
62,119

Total
$
154,603

 
$
409,116

 
$
214,977

 
$
778,696

As of December 31, 2015
 
 
 
 
 
 
 
Closed-end funds
$
3,435,823

 
$
8,557,125

 
$
26,508,067

 
$
38,501,015

Open-end funds
992,683

 
3,814,699

 
80,210

 
4,887,592

Evergreen funds
383,349

 
585,417

 
629,430

 
1,598,196

Total
$
4,811,855

 
$
12,957,241

 
$
27,217,707

 
$
44,986,803


Recent Accounting Developments
Please see note 2 to our condensed consolidated financial statements included elsewhere in this quarterly report for information regarding recent accounting developments.

94

Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to a broad range of risks inherent in the financial markets in which we participate, including price risk, interest-rate risk, access to and cost of financing risk, liquidity risk, counterparty risk and foreign exchange-rate risk. Potentially negative effects of these risks may be mitigated to a certain extent by those aspects of our investment approach, investment strategies, fundraising practices or other business activities that are designed to benefit, either in relative or absolute terms, from periods of economic weakness, tighter credit or financial market dislocations.
Our predominant exposure to market risk is related to our role as general partner or investment adviser to our funds and as an investor in our CLOs, and the sensitivities to movements in the fair value of their investments on management fees, incentive income and investment income, as applicable. The fair value of the financial assets and liabilities of our funds and CLOs may fluctuate in response to changes in, among many factors, the fair value of securities, foreign-exchange rates, commodities prices and interest rates.
Price Risk
Impact on Net Change in Unrealized Appreciation (Depreciation) on Consolidated Funds’ Investments
As of September 30, 2016, we had investments, at fair value of $3.7 billion related to our consolidated funds, primarily consisting of investments held by our CLOs. We estimate that a 10% decline in market values would result in a decrease in unrealized appreciation (depreciation) on the consolidated funds’ investments of $367.6 million. Of this decline, approximately $147.2 million would impact net income attributable to Oaktree Capital Group, LLC, with the remainder attributable to non-controlling interests and third-party debt holders in our CLOs. The magnitude of the impact on net income attributable to Oaktree Capital Group, LLC is largely affected by the percentage of our equity ownership interest and levered nature of our CLO investments.
Impact on Segment Management Fees
Management fees are generally assessed in the case of (a) our open-end and evergreen funds, based on NAV, and (b) our closed-end funds, based on committed capital, drawn capital or cost basis during the investment period and, during the liquidation period, based on the lesser of (i) the total funded committed capital or (ii) the cost basis of assets remaining in the fund. Management fees are affected by changes in market values to the extent they are based on NAV. For the nine months ended September 30, 2016 and 2015, NAV-based management fees represented approximately 30% and 36%, respectively, of total management fees. Based on investments held as of September 30, 2016, we estimate that a 10% decline in market values of the investments held in our funds would result in an approximate $5.8 million decrease in the amount of quarterly management fees. These estimated effects are without regard to a number of factors that would be expected to increase or decrease the magnitude of the change to degrees that are not readily quantifiable, such as the use of leverage facilities in certain of our funds or the timing of fund flows.
Impact on Segment Incentive Income
Incentive income is recognized only when it is known or knowable, which in the case of (a) our closed-end funds, generally occurs only after all contributed capital and an annual preferred return on that capital (typically 8%) have been distributed to the fund’s investors and (b) our active evergreen funds, generally occurs as of December 31, based on the increase in the fund’s NAV during the year, subject to any high-water marks or hurdle rates. In the case of closed-end funds, the link between short-term fluctuations in market values and a particular period’s incentive income may in part be indirect. Thus the effect on incentive income of a 10% decline in market values is not readily quantifiable. A decline in market values would be expected to cause a decline in incentive income.
Impact on Segment Investment Income
Investment income or loss arises from our pro-rata share of income or loss from our investments, generally in our capacity as general partner in our funds and as an investor in our CLOs and third-party managed funds or companies. This income is directly affected by changes in market risk factors. Based on investments held as of September 30, 2016, a 10% decline in fair values of the investments held in our funds and other holdings would result in a $241.1 million decrease in the amount of investment income. The estimated decline of $241.1 million is greater than 10% of the September 30, 2016 corporate investments balance primarily due to the levered nature of our CLO investments. These estimated effects are without regard to a number of factors that would be expected to increase or decrease the magnitude of the change to degrees that are not readily quantifiable, such as the use of leverage facilities in certain of our funds, the timing of fund flows or the timing of new investments or realizations.

95

Exchange-rate Risk
Our business is affected by movements in the exchange rate between the U.S. dollar and non-U.S. dollar currencies in the case of (a) management fees that vary based on the NAV of our funds that hold investments denominated in non-U.S. dollar currencies, (b) management fees received in non-U.S. dollar currencies, (c) operating expenses for our foreign offices that are denominated in non-U.S. dollar currencies and (d) cash balances we hold in non-U.S. dollar currencies. We manage our exposure to exchange-rate risks through our regular operating activities and, when appropriate, through the use of derivative instruments.
We estimate that for the nine months ended September 30, 2016, without considering the impact of derivative instruments, a 10% decline in the average exchange rate of the U.S. dollar would have resulted in the following approximate effects on our segment results:
•
our management fees (relating to (a) and (b) above) would have increased by $8.1 million;
•
our operating expenses would have increased by $10.1 million;  
•
OCGH interest in net income of consolidated subsidiaries would have decreased by $1.2 million; and
•
our income tax expense would have decreased by $0.3 million.
These movements would have decreased our net income attributable to OCG by $0.5 million.
At any point in time, some of the investments held by our closed-end and evergreen funds may be denominated in non-U.S. dollar currencies on an unhedged basis. Changes in currency rates could affect incentive income, incentives created (fund level) and investment income with respect to such closed-end and evergreen funds; however, the degree of impact is not readily determinable because of the many indirect effects that currency movements may have on individual investments.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which we enter into financial transactions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.
Interest-rate Risk
As of September 30, 2016, Oaktree and its operating subsidiaries had $796 million in debt obligations, net of debt issuance costs, consisting of four senior notes issuances and a funded term loan. Each senior notes issuance accrues interest at a fixed rate. The funded term loan accrues interest at a variable rate; however, we entered into an interest-rate swap that effectively converted the term loan’s floating interest rate to fixed through January 2017. As a result, for the nine months ended September 30, 2016, there would not have been a material impact to interest expense attributable to Oaktree and its operating subsidiaries resulting from a 100-basis point increase in interest rates. Of the $1.1 billion of aggregate segment cash and U.S. Treasury and time deposit securities as of September 30, 2016, we estimate that Oaktree and its operating subsidiaries would generate an additional $11.4 million in interest income on an annualized basis as a result of a 100-basis point increase in interest rates.
Our consolidated funds have debt obligations, most of which accrue interest at variable rates. Changes in these rates would affect the amount of interest payments that our funds would have to make, impacting future earnings and cash flows. As of September 30, 2016, $3.0 billion was outstanding under these debt obligations. We estimate that interest expense relating to variable-rate debt would increase on an annualized basis by $28.4 million in the event interest rates were to increase by 100 basis points.
As credit-oriented investors, we are also subject to interest-rate risk through the securities we hold in our consolidated funds. A 100-basis point increase in interest rates would be expected to negatively affect prices of securities that accrue interest income at fixed rates and therefore negatively impact the net change in unrealized appreciation (depreciation) on consolidated funds’ investments. The actual impact is dependent on the average duration of such holdings. Conversely, securities that accrue interest at variable rates would be expected to benefit from a 100-basis point increase in interest rates because these securities would generate higher levels of current income and therefore positively impact interest and dividend income. In cases where our funds pay management

96

fees based on NAV, we would expect our segment management fees to experience a change in direction and magnitude corresponding to that experienced by the underlying portfolios.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective at the reasonable assurance level to accomplish their objectives of ensuring that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during our most recent quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


97

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, please see the section entitled “Legal Actions” in note 15 to our condensed consolidated financial statements included elsewhere in this quarterly report, which section is incorporated herein by reference. Also, please see Item “1A. Risk Factors—Risks Related to Our Business—Extensive regulation in the United States and abroad affects our activities and creates the potential for significant liabilities and penalties that could adversely affect our business and results of operations” in our annual report.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, please see the information under “Risk Factors” in our annual report and in our quarterly report on Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 4, 2016. There have been no material changes to the risk factors as disclosed in our annual report and such quarterly report.
The risks described in our annual report and such quarterly report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Fund Data
Information regarding our closed-end, open-end and evergreen funds, together with benchmark data where applicable, is set forth below. For our closed-end and evergreen funds, no benchmarks are presented in the tables as there are no known comparable benchmarks for these funds’ investment philosophy, strategy and implementation.


98

Closed-end Funds
 
 
 
 
 
As of September 30, 2016
 
Investment Period
 
Total Committed Capital
 
%
Invested (1)
 
%
Drawn (2)
 
Fund Net Income Since Inception
 
Distri-
butions Since Inception
 
Net Asset Value
 
Manage-
ment Fee-gener-
ating AUM
 
Oaktree Segment Incentive Income Recog-
nized
 
Accrued Incentives (Fund Level) (3)
 
Unreturned Drawn Capital Plus Accrued Preferred Return (4)
 
IRR Since Inception (5)
 
Multiple of Drawn Capital (6)
 
Start Date
 
End Date
 
Gross
 
Net
 
(in millions)
Distressed Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oaktree Opportunities Fund Xb
TBD
 
—
 
$
7,985

 
—
%
 
—
%
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
n/a
 
n/a
 
n/a
Oaktree Opportunities Fund X (7) 
Jan. 2016
 
Jan. 2019
 
3,243

 
48

 
15

 
192

 
41

 
637

 
3,161

 
—

 
37

 
489

 
nm
 
nm
 
1.5x
Oaktree Opportunities Fund IX
Jan. 2014
 
Jan. 2017
 
5,066

 
100

 
100

 
(45
)
 
5

 
5,016

 
4,966

 
—

 
—

 
6,104

 
2.5
%
 
(0.4
)%
 
1.1
Oaktree Opportunities Fund VIIIb
Aug. 2011
 
Aug. 2014
 
2,692

 
nm

 
100

 
403

 
1,133

 
1,962

 
2,098

 
52

 
—

 
2,517

 
6.5

 
3.3

 
1.2
Special Account B
Nov. 2009
 
Nov. 2012
 
1,031

 
nm

 
100

 
471

 
1,124

 
448

 
434

 
15

 
—

 
443

 
12.5

 
10.0

 
1.5
Oaktree Opportunities Fund VIII
Oct. 2009
 
Oct. 2012
 
4,507

 
nm

 
100

 
1,954

 
4,545

 
1,916

 
1,823

 
144

 
152

 
1,700

 
11.9

 
8.3

 
1.5
Special Account A
Nov. 2008
 
Oct. 2012
 
253

 
nm

 
100

 
289

 
463

 
79

 
75

 
42

 
16

 
—

 
28.0

 
22.6

 
2.2
OCM Opportunities Fund VIIb
May 2008
 
May 2011
 
10,940

 
nm

 
90

 
8,758

 
17,329

 
1,273

 
1,270

 
1,453

 
249

 
—

 
21.9

 
16.6

 
2.0
OCM Opportunities Fund VII
Mar. 2007
 
Mar. 2010
 
3,598

 
nm

 
100

 
1,458

 
4,647

 
409

 
644

 
81

 
—

 
543

 
10.3

 
7.5

 
1.5
OCM Opportunities Fund VI
Jul. 2005
 
Jul. 2008
 
1,773

 
nm

 
100

 
1,298

 
3,051

 
20

 
—

 
249

 
4

 
—

 
11.9

 
8.8

 
1.8
OCM Opportunities Fund V
Jun. 2004
 
Jun. 2007
 
1,179

 
nm

 
100

 
961

 
2,097

 
43

 
—

 
179

 
9

 
—

 
18.5

 
14.1

 
1.9
Legacy funds (8).
Various
 
Various
 
9,543

 
nm

 
100

 
8,205

 
17,695

 
53

 
—

 
1,113

 
11

 
—

 
24.2

 
19.3

 
1.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
22.0
%
 
16.2
 %
 
 
Real Estate Opportunities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oaktree Real Estate Opportunities Fund VII (9) 
Jan. 2016
 
Jan. 2020
 
$
2,456

 
41
%
 
—
%
 
$
22

 
$
8

 
$
14

 
$
1,989

 
$
—

 
$
—

 
$
—

 
n/a
 
n/a
 
n/a
Oaktree Real Estate Opportunities Fund VI
Aug. 2012
 
Aug. 2016
 
2,677

 
nm

 
100

 
1,062

 
990

 
2,749

 
2,135

 
10

 
195

 
2,261

 
17.9
%
 
12.0
 %
 
1.5x
Oaktree Real Estate Opportunities Fund V
Mar. 2011
 
Mar. 2015
 
1,283

 
nm

 
100

 
910

 
1,489

 
704

 
383

 
56

 
117

 
266

 
17.6

 
13.0

 
1.8
Special Account D
Nov. 2009
 
Nov. 2012
 
256

 
nm

 
100

 
179

 
306

 
137

 
73

 
3

 
14

 
79

 
14.7

 
12.6

 
1.7
Oaktree Real Estate Opportunities Fund IV
Dec. 2007
 
Dec. 2011
 
450

 
nm

 
100

 
394

 
709

 
135

 
99

 
45

 
29

 
—

 
16.2

 
11.1

 
2.0
OCM Real Estate Opportunities Fund III
Sep. 2002
 
Sep. 2005
 
707

 
nm

 
100

 
618

 
1,300

 
25

 
—

 
117

 
5

 
—

 
15.3

 
11.3

 
2.0
Legacy funds (8).
Various
 
Various
 
1,634

 
nm

 
99

 
1,399

 
3,009

 
—

 
—

 
112

 
—

 
—

 
15.2

 
12.0

 
1.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.5
%
 
12.0
 %
 
 
Real Estate Debt
 
 
 
 
 

 
 
 
 
 
 

 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
 

 
 
Oaktree Real Estate Debt Fund (10).
Sep. 2013
 
Oct. 2016
 
$
1,112

 
96
%
 
55
%
 
$
81

 
$
411

 
$
281

 
$
594

 
$
—

 
$
12

 
$
220

 
26.5
%
 
19.4
 %
 
 1.2x
Oaktree PPIP Fund (11) .
Dec. 2009
 
Dec. 2012
 
2,322

 
nm

 
48

 
457

 
1,570

 
—

 
—

 
47

 
—

 
—

 
28.2

 
n/a

 
1.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Value Add
 
 
 
 
 

 
 
 
 
 
 

 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
 

 
 
Oaktree Pinnacle Investment Fund (7) (10) 
Oct. 2016
 
Oct. 2020
 
$
615

 
2
%
 
2
%
 
$
—

 
$
—

 
$
10

 
$
10

 
$
—

 
$
—

 
$
11

 
nm
 
nm
 
 1.0x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Principal Investments (12)
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 

 
 
Oaktree European Principal Fund IV (13) 
TBD
 
—
 
€
893

 
2
%
 
—
%
 
€
(4
)
 
€
—

 
€
(4
)
 
€
17

 
€
—

 
€
—

 
€
—

 
n/a
 
n/a
 
n/a
Oaktree European Principal Fund III
Nov. 2011
 
Nov. 2016
 
€
3,164

 
100

 
85

 
€
1,420

 
€
417

 
€
3,752

 
€
2,921

 
€
—

 
€
276

 
€
3,016

 
19.4
%
 
12.6
 %
 
1.6x
OCM European Principal Opportunities Fund II
Dec. 2007
 
Dec. 2012
 
€
1,759

 
nm

 
100

 
€
498

 
€
1,544

 
€
685

 
€
849

 
€
29

 
€
—

 
€
980

 
9.4

 
5.4

 
1.4
OCM European Principal Opportunities Fund
Mar. 2006
 
Mar. 2009
 
$
495

 
nm

 
96

 
$
454

 
$
927

 
$
—

 
$
—

 
$
87

 
$
—

 
$
—

 
11.7

 
8.9

 
2.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
13.3
%
 
8.8
 %
 
 


99

 
 
 
 
 
As of September 30, 2016
 
Investment Period
 
Total Committed Capital
 
%
Invested (1)
 
%
Drawn (2)
 
Fund Net Income Since Inception
 
Distri-
butions Since Inception
 
Net Asset Value
 
Manage-
ment Fee-gener-
ating AUM
 
Oaktree Segment Incentive Income Recog-
nized
 
Accrued Incentives (Fund Level) (3)
 
Unreturned Drawn Capital Plus Accrued Preferred Return (4)
 
IRR Since Inception (5)
 
Multiple of Drawn Capital (6)
 
Start Date
 
End Date
 
Gross
 
Net
 
(in millions)
European Private Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oaktree European Capital Solutions Fund (7) (10)
Dec. 2015
 
Dec. 2018
 
€
286

 
54
%
 
34
%
 
€
1

 
€
—

 
€
100

 
€
142

 
€
—

 
€
—

 
€
101

 
nm
 
nm
 
1.0x
Oaktree European Dislocation Fund (10).
Oct. 2013
 
Oct. 2016
 
€
294

 
85

 
56

 
€
33

 
€
140

 
€
75

 
€
125

 
€
—

 
€
4

 
€
55

 
23.6
%
 
16.9
%
 
1.2
Special Account E
Oct. 2013
 
Apr. 2015
 
€
379

 
nm

 
69

 
€
54

 
€
200

 
€
115

 
€
131

 
€
—

 
€
7

 
€
93

 
14.6

 
11.2

 
1.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16.7
%
 
12.4
%
 
 
Global Principal Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oaktree Principal Fund VI
Nov. 2015
 
Nov. 2018
 
$
1,223

 
44
%
 
17
%
 
$
45

 
$
67

 
$
186

 
$
1,167

 
$
—

 
$
9

 
$
155

 
47.1
%
 
20.6
%
 
1.4x
Oaktree Principal Fund V
Feb. 2009
 
Feb. 2015
 
2,827

 
nm

 
91

 
453

 
1,451

 
1,588

 
1,773

 
50

 
—

 
2,133

 
8.2

 
3.7

 
1.3
Special Account C
Dec. 2008
 
Feb. 2014
 
505

 
nm

 
91

 
204

 
377

 
287

 
299

 
21

 
3

 
278

 
11.6

 
8.2

 
1.5
OCM Principal Opportunities Fund IV
Oct. 2006
 
Oct. 2011
 
3,328

 
nm

 
100

 
2,806

 
4,061

 
2,073

 
691

 
22

 
525

 
1,230

 
12.4

 
8.9

 
2.0
OCM Principal Opportunities Fund III
Nov. 2003
 
Nov. 2008
 
1,400

 
nm

 
100

 
886

 
2,206

 
80

 
—

 
157

 
15

 
—

 
13.8

 
9.5

 
1.8
Legacy funds (8).
Various
 
Various
 
2,301

 
nm

 
100

 
1,839

 
4,138

 
2

 
—

 
236

 
—

 
—

 
14.5

 
11.6

 
1.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
13.2
%
 
9.5
%
 
 
Power Opportunities
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 

 
 
Oaktree Power Opportunities Fund IV (7) 
Nov. 2015
 
Nov. 2020
 
$
1,106

 
22
%
 
22
%
 
$
(7
)
 
$
—

 
$
240

 
$
1,078

 
$
—

 
$
—

 
$
254

 
nm
 
nm
 
1.0x
Oaktree Power Opportunities Fund III
Apr. 2010
 
Apr. 2015
 
1,062

 
nm

 
66

 
329

 
575

 
452

 
407

 
14

 
48

 
299

 
21.1
%
 
12.5
%
 
1.6
OCM/GFI Power Opportunities Fund II
Nov. 2004
 
Nov. 2009
 
1,021

 
nm

 
53

 
1,450

 
1,982

 
9

 
—

 
100

 
1

 
—

 
76.1

 
58.8

 
3.9
OCM/GFI Power Opportunities Fund
Nov. 1999
 
Nov. 2004
 
449

 
nm

 
85

 
251

 
634

 
—

 
—

 
23

 
—

 
—

 
20.1

 
13.1

 
1.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
34.7
%
 
26.5
%
 
 
Infrastructure Investing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oaktree Infrastructure Fund (14) 
TBD
 
—
 
$
409

 
—
%
 
—
%
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
n/a

 
n/a

 
n/a
Highstar Capital IV (15).
Nov. 2010
 
Nov. 2016
 
2,610

 
99

 
99

 
544

 
552

 
2,573

 
1,730

 
—

 
5

 
1,947

 
15.2
%
 
8.7
%
 
1.4x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine Finance
 
 
 
 
 

 
 
 
 
 
 

 
 

 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
Oaktree Mezzanine Fund IV (10) 
Oct. 2014
 
Oct. 2019
 
$
852

 
40
%
 
37
%
 
$
26

 
$
20

 
$
319

 
$
306

 
$
—

 
$
4

 
$
314

 
12.5
%
 
8.5
%
 
1.1x
Oaktree Mezzanine Fund III (16).
Dec. 2009
 
Dec. 2014
 
1,592

 
nm

 
89

 
385

 
1,428

 
380

 
377

 
10

 
23

 
350

 
15.1

10.4 / 8.4
1.4
OCM Mezzanine Fund II
Jun. 2005
 
Jun. 2010
 
1,251

 
nm

 
88

 
527

 
1,489

 
145

 
—

 
—

 
—

 
166

 
11.3

 
7.8

 
1.6
OCM Mezzanine Fund (17).
Oct. 2001
 
Oct. 2006
 
808

 
nm

 
96

 
302

 
1,073

 
2

 
—

 
38

 
—

 
—

 
15.4

 
10.8 / 10.5
1.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.2
%
 
8.9
%
 
 
Emerging Markets Opportunities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oaktree Emerging Market Opportunities Fund (18) 
Sep. 2013
 
Sep. 2017
 
$
384

 
65
%
 
65
%
 
$
29

 
$
1

 
$
278

 
$
228

 
$
—

 
$
—

 
$
286

 
10.1
%
 
6.4
%
 
1.2x
Special Account F
Jan. 2014
 
Jan. 2017
 
253

 
66

 
66

 
20

 
—

 
187

 
186

 
—

 
—

 
191

 
9.1

 
7.0

 
1.2
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
32,699

(12) 
 
1,805

(12) 
 
9.7
%
 
6.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Other (19)
 
 
7,864

 
 
 
22

 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total (20)
 
 
$
40,563

 
 
 
$
1,827

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
For our incentive-creating closed-end funds in their investment periods, this percentage equals invested capital divided by committed capital. Invested capital for this purpose is the sum of capital drawn from fund investors plus net borrowings, if any, outstanding, under a fund-level credit facility where such borrowings were made in lieu of drawing capital from fund investors.
(2)
Represents capital drawn from fund investors divided by committed capital. The aggregate change in drawn capital for the three months ended September 30, 2016 was $624 million.
(3)
Accrued incentives (fund level) exclude Oaktree segment incentive income previously recognized.
(4)
Unreturned drawn capital plus accrued preferred return reflects the amount the fund needs to distribute to its investors as a return of capital and a preferred return (as applicable) before Oaktree is entitled to receive incentive income (other than tax distributions) from the fund.
(5)
The internal rate of return (“IRR”) is the annualized implied discount rate calculated from a series of cash flows. It is the return that equates the present value of all capital invested in an investment to the present value of all returns of capital, or the discount rate that will provide a net present value of all cash flows equal to zero. Fund-level IRRs are calculated based upon the actual timing of cash contributions/distributions to investors and the residual value of such investor’s capital accounts at the end of the applicable period being measured. Gross IRRs reflect returns before allocation of management fees, expenses and any incentive allocation to the fund’s general partner. To the extent material, gross returns include certain transaction, advisory, directors or other ancillary fees (“fee income”) paid directly to us in connection with our funds’ activities (we credit all such fee income back to the respective fund(s) so that our funds’ investors share pro rata in the fee income’s economic benefit). Net IRRs reflect returns to non-affiliated investors after allocation of management fees, expenses and any incentive allocation to the fund’s general partner.
(6)
Multiple of drawn capital is calculated as drawn capital plus gross income and, if applicable, fee income before fees and expenses divided by drawn capital.
(7)
The IRR is not considered meaningful (“nm”) as the period from the initial capital contribution through September 30, 2016 was less than 18 months.

100

(8)
Legacy funds represent certain predecessor funds within the relevant strategy that have substantially or completely liquidated their assets, including funds managed by certain Oaktree investment professionals while employed at the Trust Company of the West prior to Oaktree’s founding in 1995. When these employees joined Oaktree upon, or shortly after, its founding, they continued to manage the fund through the end of its term pursuant to a sub-advisory relationship between the Trust Company of the West and Oaktree.
(9)
A portion of this fund pays management fees based on drawn, rather than committed, capital.
(10)
Management fees during the investment period are calculated on drawn capital or cost basis, rather than committed capital. As a result, as of September 30, 2016 management fee-generating AUM included only that portion of committed capital that had been drawn.
(11)
Due to differences in the allocation of income and expenses to this fund’s two primary limited partners, the U.S. Treasury and Oaktree PPIP Private Fund, a combined net IRR is not presented. Of the $2,322 million in capital commitments, $1,161 million related to the Oaktree PPIP Private Fund, whose gross and net IRR were 24.7% and 18.6%, respectively.
(12)
Aggregate IRRs or totals are based on the conversion of cash flows or amounts, respectively, from euros to USD using the September 30, 2016 spot rate of $1.12.
(13)
Management fees are based on aggregate contributed capital for the period from the initial investment date until the investment period start date, which includes indebtedness incurred in lieu of drawn capital.
(14)
A portion of the $409 million of commitments to Oaktree Infrastructure Fund as of September 30, 2016 was subject to certain contingencies.
(15)
The fund includes co-investments of $626 million in AUM, most of which do not pay management fees or an incentive allocation. These co-investments have been excluded from the calculation of gross and net IRR, as well as the unreturned drawn capital plus accrued preferred return amount and multiple of drawn capital. The fund follows the American-style distribution waterfall, whereby the general partner may receive an incentive allocation as soon as it has returned the drawn capital and paid a preferred return on the fund’s realized investments (i.e., on a deal-by-deal basis). However, such cash distributions of incentives may be subject to repayment, or clawback. As of September 30, 2016, Oaktree had not recognized any incentive income from this fund. The accrued incentives (fund level) amount shown for this fund represents Oaktree’s effective 8% of the potential incentives generated by this fund in accordance with the terms of the Highstar acquisition.
(16)
The fund’s partnership interests are divided into Class A and Class B interests, with the Class A interests having priority with respect to the distribution of current income and disposition proceeds. The net IRR for Class A interests was 10.4% and Class B interests was 8.4%. The combined net IRR for Class A and Class B interests was 9.5%.
(17)
The fund’s partnership interests are divided into Class A and Class B interests, with the Class A interests having priority with respect to the distribution of current income and disposition proceeds. The net IRR for Class A interests was 10.8% and Class B interests was 10.5%. The combined net IRR for the Class A and Class B interests was 10.6%.
(18)
In the third quarter of 2016, the investment period for Oaktree Emerging Market Opportunities Fund was extended for a one year period until September 2017. However, management fees stepped down to the post-investment period basis effective October 1, 2016.
(19)
This includes our closed-end Senior Loan funds, Oaktree Asia Special Situations Fund, OCM Asia Principal Opportunities Fund, CLOs, a non-Oaktree fund, certain separate accounts, co-investments and certain evergreen separate accounts in our Real Estate Debt, Emerging Markets Opportunities and Emerging Markets Total Return strategies.
(20)
This excludes two closed-end funds with management fee-generating AUM aggregating $522 million as of September 30, 2016, which has been included as part of the Strategic Credit strategy within the evergreen funds table, and includes certain evergreen separate accounts in our Real Estate Debt, Emerging Markets Opportunities and Emerging Markets Total Return strategies with an aggregate $623 million of management fee-generating AUM.


101

Open-end Funds
 
 
 
Manage-
ment Fee-gener-
ating AUM
as of
Sept. 30, 2016
 
Twelve Months Ended
September 30, 2016
 
Since Inception through September 30, 2016
 
Strategy Inception
 
 
Rates of Return (1)
 
Annualized Rates of Return (1)
 
Sharpe Ratio
 
Oaktree
 
Rele-
vant Bench-
mark
 
Oaktree
 
Rele-
vant Bench-
mark
 
Oaktree Gross
 
Rele-
vant Bench-
mark
 
Gross
 
Net
 
 
Gross
 
Net
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. High Yield Bonds
Jan. 1986
 
$
15,938

 
10.8
%
 
10.2
%
 
12.4
%
 
9.4
 %
 
8.8
 %
 
8.4
 %
 
0.80
 
0.56
Global High Yield Bonds
Nov. 2010
 
4,424

 
11.8

 
11.2

 
12.8

 
7.4

 
6.9

 
6.9

 
1.10
 
1.05
European High Yield Bonds
May 1999
 
1,444

 
11.8

 
11.3

 
11.7

 
8.1

 
7.6

 
6.3

 
0.70
 
0.43
U.S. Convertibles
Apr. 1987
 
3,559

 
6.9

 
6.4

 
9.1

 
9.4

 
8.9

 
8.1

 
0.48
 
0.35
Non-U.S. Convertibles
Oct. 1994
 
1,502

 
4.9

 
4.4

 
1.6

 
8.4

 
7.9

 
5.6

 
0.77
 
0.40
High Income Convertibles
Aug. 1989
 
828

 
11.2

 
10.3

 
12.7

 
11.5

 
10.6

 
8.2

 
1.05
 
0.59
U.S. Senior Loans
Sept. 2008
 
1,565

 
4.9

 
4.4

 
5.3

 
6.0

 
5.5

 
5.2

 
1.06
 
0.63
European Senior Loans
May 2009
 
1,491

 
6.0

 
5.5

 
4.9

 
8.5

 
8.0

 
9.3

 
1.71
 
1.72
Emerging Markets Equities
Jul. 2011
 
3,166

 
18.9

 
18.0

 
16.8

 
(1.5
)
 
(2.3
)
 
(2.0
)
 
(0.08)
 
(0.11)
Other
 
 
231

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
34,148

 
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
(1)
Returns represent time-weighted rates of return, including reinvestment of income, net of commissions and transaction costs. The returns for Relevant Benchmarks are presented on a gross basis.
Evergreen Funds
 
 
 
As of September 30, 2016
 
Twelve Months Ended
September 30, 2016
 
Since Inception through
September 30, 2016
 
 
 
AUM
 
Manage-
ment
Fee-gener-
ating AUM
 
Accrued Incen-
tives (Fund Level)
 
 
 
Strategy Inception
 
 
 
 
Rates of Return (1)
 
Annualized Rates
of Return (1)
 
 
 
Gross
 
Net
 
Gross
 
Net
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Strategic Credit (2).
Jul. 2012
 
$
3,248

 
$
2,438

 
$
16

 
9.4
%
 
6.3
%
 
8.3
%
 
5.9
%
Value Opportunities
Sept. 2007
 
1,220

 
1,158

 
—

(3) 
5.7

 
3.7

 
9.1

 
5.0

Value Equities (4) 
May 2012
 
342

 
275

 
1

 
12.4

 
7.9

 
17.7

 
11.9

Emerging Markets Absolute Return
Apr. 1997
 
138

 
118

 
—

(3) 
7.2

 
5.7

 
13.0

 
8.7

 
 
 
 
 
3,989

 
17

 
 
 
 
 
 
 
 
Restructured funds
 
 
—

 
5

 
 
 
 
 
 
 
 
Total (2) (5)
 
 
$
3,989

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Returns represent time-weighted rates of return.
(2)
Includes two closed-end funds with an aggregate $794 million and $522 million of AUM and management fee-generating AUM, respectively. Beginning with the third quarter of 2016, annual performance-based fees have been reflected as incentive income (as opposed to management fees). Such amounts were not material in prior periods.
(3)
As of September 30, 2016, the aggregate depreciation below high-water marks previously established for individual investors in the fund totaled approximately $129 million for Value Opportunities and $5 million for Emerging Markets Absolute Return.
(4)
Includes performance results of a proprietary fund with an initial capital commitment of $25 million since its inception on May 1, 2012.
(5)
Total excludes certain evergreen separate accounts in our Real Estate Debt, Emerging Markets Opportunities and Emerging Markets Total Return strategies with an aggregate $623 million of management fee-generating AUM as of September 30, 2016.


102

Item 6. Exhibits
For a list of exhibits filed with this report, refer to the Exhibits Index on the page immediately preceding the exhibits, which Exhibit Index is incorporated herein by reference.

103

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 4, 2016  
 
Oaktree Capital Group, LLC
 
By:
/s/    Susan Gentile
 
Name:
Susan Gentile
 
 
 
 
Title:
Chief Accounting Officer and Managing Director
and Authorized Signatory


104

EXHIBITS INDEX
Exhibit No.
Description of Exhibit
 
 
3.1
Restated Certificate of Formation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on June 17, 2011).
 
 
3.2
Third Amended and Restated Operating Agreement of the Registrant dated as of August 31, 2011 (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on September 2, 2011).
 
 
3.3
Amendment to Third Amended and Restated Operating Agreement of the Registrant dated as of
March 29, 2012 (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on March 30, 2012).
 
 
3.4
Unit Designation, effective November 16, 2015 (incorporated by reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K, filed with the SEC on November 18, 2015).
 
 
10.1*
Letter Agreement between Oaktree Capital Management, L.P. and Scott Graves dated September 14, 2016.
 
 
31.1
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
32.2
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
101.INS
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
* Management contract or compensatory plan or arrangement.


105

Oaktree Capital Group, LLC Reports